Health care reform imposes rigid new rules for over-the-counter drugs  

Marcus Pickett

New rules included in federal health care reform legislation now make it more difficult to use health savings accounts (HSAs) and flexible spending accounts (FSAs) to buy over-the-counter drugs.

HSAs and FSAs are special financial accounts that allow enrollees to use pre-tax income for certain health-related expenses. In combination with a high-deductible health insurance plan, these health accounts allow consumers to take more control over their health care, while still limiting their financial exposure to catastrophic medical expenses.

In the past, qualified FSA and HSA expenses included over-the-counter (OTC) drugs. Now, the rules regarding these drugs are more rigid. As of Jan. 1, 2011, FSA HSA enrollees no longer are able to use the money in their accounts to buy OTC drugs, unless they have prescriptions for them.

What the new rules mean for consumers

The new rule raises many questions about the effects on consumers. Will they simply scale back their medical accounts by saving less? Will the inconvenience of seeking a prescription outweigh the tax incentives? Will primary care physicians start writing prescriptions for ibuprofen? Will the medical accounts themselves no longer be worth the trouble?

The Nielson Co. tried to answer some of these questions in a December 2010 survey. It found that 19 million U.S. households were enrolled in FSAs and that 52 percent used their FSA coverage to purchase OTC medications. Of these households, 21percent said they would change nothing about their medication purchases, while the same percent of respondents indicated they would "drastically reduce or discontinue purchasing of OTC medications." Meanwhile, 46 percent of respondents said they would request a prescription for OTC drugs from a physician.

For those who plan to do nothing differently with their OTC medications, it's important to keep an eye on the funds accrued in an FSA. Any FSA funds not used within the employer's established period are surrendered to the employer to do with as it pleases. By no longer using the account for OTC medications, the allocated funds may not get used. To avoid this problem, enrollees may need to looking at lowering their FSA allocations.

Criticism of the new system

Critics fear that forcing thousands of people to get prescriptions for headache or heartburn medication (and paying health insurance co-pays to do so) is not an efficient use of health care resources. This potential run on doctors' offices was one of the criticisms leveled on the new FSA and HSA rules by Jody Dietel, president of the Special Interest Group for Inventory Information Approval System Standards.

In a July 2010 letter to Treasury Secretary Timothy Geithner, Dietel and her group expressed concern about the implementation period and ambiguity within these new rules. Among other requests, the letter asks the Treasury Department to "provide guidance on the meaning of a 'prescribed' drug" and to provide a one-month grace period to ease compliance for both consumers and retailers.

IRS documents acknowledge that, because of the significant changes that will need to be made to existing debit card systems, it would not challenge OTC purchases made with FSA or HSA debit cards through Jan. 15, 2011. After that date, however, all OTC drug purchases must be substantiated with a prescription number before the customer can be reimbursed through an FSA or HSA.

Exemptions to the new rules

Insulin treatments received a blanket exem ption, according to the IRS. It's also worth pointing out that aside from medications, not all health care products and services re quire a prescription for FSA and HSA eligibility. Crutches, eye glasses, bandages, contact lenses and other approved medic al expenses remain eligible.