Don't Mess With Taxes

Did the change in the rules that made it harder to buy over-the-counter medicine with money from tax-advantaged medical accounts give you a major headache?

Congress might be considering a remedy.

The House Ways and Means Subcommittee on Oversight will hear this afternoon from folks about the real-life effects of the restrictions on Flexible Spending Arrangements (FSAs), Health Savings Accounts (HSAs) and Health Reimbursement Accounts (HRAs).

Covered, then not covered: People enrolled in these accounts cheered in 2003 when the Internal Revenue Service changed the rules and allowed money from the tax-saving medical accounts to be used to pay for over-the-counter (OTC) items.

Pharmacies and groceries stores also were delighted, as folks loaded up on cough medicine, aspirin and the like at the end of the year to use up their spending account dollars.

But in 2011 the rules changed again.

As part of the Patient Protection and Affordable Care Act, OTC treatments are no longer reimbursable medical savings account expenditures unless the patient gets a doctor's prescription.

Talk about a sick feeling!

You have a cold and know that icky green syrup will do the trick, but you have to call your doctor and/or make an office visit to get an Rx so that your medical account administrator can pay for the treatment.

Many folks don't bother and end up paying for off the shelf medications on their own. That, says Oversight Subcommittee Chairman Charles W. Boustany, Jr. (R-La.), is a tax increase.

So why the change? As are most Congressional acts, it was a way to raise a few more dollars.

Total OTC retail drug sales in the United States have consistently increased, notes a Joint Committee on Taxation report prepared for the hearing, rising from $1.9 billion dollars annually in 1964 to $18.9 billion dollars annually in 1999. Since 2002, data shows a continued upward trend in OTC retail sales.

As the table below indicates, cough and cold remedies, pain products, heartburn medicines  and toothpaste comprise the largest portion of overall OTC retail sales from 2007 to 2010. In 2010, cough and cold remedies comprised 24 percent of total OTC retail drug sales, pain relievers comprised 14 percent and heartburn medicines comprised 8 percent.

And a lot of that money was being subsidized by tax-free medical savings account reimbursements.

Over-the-Counter Retail Drug Sales
By Category and in Millions of Dollars

Source: The Nielsen Company (total U.S. food, drug, and mass, excluding Wal-Mart). Sales figures are approximate for 52 weeks ending the Saturday prior to January 1 of a given year. Sales are in millions of nominal U.S. dollars. A few categories include a combination of OTC medicines as well as health-related products which are not classified as medicines by the Food and Drug Administration. Click image for a larger view.

It also was an effort to make the medical spending account rules and the itemized medical deductions requirements the same. The Joint Committee on Taxation explains:

A tax subsidy for over-the-counter medicines not prescribed by a physician may be likened to providing a deduction for personal expenses. Such medicines (e.g., aspirin and cough syrup) are often routine purchases made by many taxpayers. Further, a subsidy for nonprescription over-the-counter medicines may complicate taxpayers' effort to comply with the law. The task of distinguishing products that are medical from those that are not may prove difficult for many over-the-counter products, such as toiletries and products that promote general health. Thus, continuing to subsidize such expenses may lead more taxpayers to claim tax benefits for such general health products. Consequently, some argue that providing a tax subsidy for the purchase of nonprescription over-the-counter medicine is not integral to the policy objectives of the present-law provisions for health expenses, and may be counter to such policies.

Across-the-board opponents: Critics of the OTC Rx requirement argue that it could result in unnecessary doctor visits and thereby increase the cost of health care.

And that, they say, could actually offset any added revenue from not allowing easy OTC reimbursements.

Boustany, himself an M.D., acknowledges that argument in the hearing announcement, noting that physician groups have suggested that the OTC medication prescription requirement has imposed an unreasonable administrative burden, resulted in longer waits for appointments and has increased health care costs. 

"Too often in Washington, officials make decisions about health care policy based on abstract theories and budgetary scores. This hearing will focus on how one decision in particular -- the limitation on how consumers may use their own FSA, HSA or HRA money -- has adversely affected access and affordability for families, physicians, and job creators," said Boustany.

Witness list: Scheduled to testify on the OTC medications reimbursement issue are --

• Scott M. Melville, President and Chief Executive Officer, Consumer Healthcare Products Association
• Dr. Joel M. Feder, D.O., F.A.C.O.F.P., Captain MC, USN (Ret.), American Osteopathic Association
• Steven Taylor, Chief Executive Officer, Sjogren’s Syndrome Foundation
• Jennifer Hatcher, Senior Vice President, Government & Public Affairs, Food Marketing Institute
• Paul N. Van de Water, Senior Fellow, Center on Budget and Policy Priorities

I'll try to check in on the hearing this afternoon.

And I'll definitely at least come back here and provide links (done; see above) to the witnesses' prepared testimony as soon as it is available.

Good move to reasonable policy: We all know that Congressional hearings often are as much about politics as real policy.

And Boustany is making hay with his statements about the OTC rule leading to increased overall health care costs and tax increases on American families.

But I'm giving him a pass on the rhetoric because he's right.

This was a stupid rule change.

I hope that today's Ways and Means subcommittee review is a big step toward reinstating the easier OTC is OK approach to medical spending account reimbursement.

You also might find these items of interest:

• Spend your FSA
• March 15 is FSA deadline for some
• High deductible health care's high cost