OTC drugs require prescriptions for account reimbursement

Key Points

Saving cash on over-the-counter (OTC) drugs has just gotten tougher for employees with tax-advantaged health accounts, including flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), and health savings accounts (HSAs). The Patient Protection and Affordable Care Act (PPACA) requires account holders to have a prescription for an OTC drug to qualify for account reimbursement and preferred tax treatment starting this month. Insulin and OTC medical devices and supplies are exempt.

Robert Zirkelbach, spokesman for America's Health Insurance Plans, sees the new ruling as flawed. "Now those with tax-favored accounts need to see a physician for a daily medication, clogging doctor's offices when there is already a primary-care physician shortage and promoting the use of more costly prescription drugs," he said. "The changes are adding unnecessary costs to the system."

Dorothy Miraglia, principal, strategic benefit solutions, AlphaStaff, a human resource outsourcing company based in Fort Lauderdale, thinks that employees should be encouraged from the onset of a problem to visit their physicians before buying even an OTC drug, she said. This could ensure use of the most effective remedy, avoid contraindicated drugs, and produce better healthcare purchasers.

Follow the rules

In order for tax-favored account holders to receive reimbursement from their tax-advantaged accounts for OTC drugs, they must submit a prescription and receipt for the purchase. FSA/HRA debit cards can be used for a drug transaction with a prescription, according to new guidance issued at the end of December by the Internal Revenue Service (IRS), which controls tax-advantaged accounts.

Consumers, however, must follow the new rules carefully, because account withdrawals for payment of nonqualifying medical expenses will be reflected in an employee's gross income and subject to an additional tax of 20%.

A simple doctor's note will not suffice for the tax benefit. A written or electronic drug order meeting the legal requirements of a prescription in the state where the medical expense is incurred, issued by an individual legally authorized to issue the prescription, is required.

David Goldfarb, founder and principal, DSG Benefits Group, a Dallas employee-benefits brokerage and consulting firm, thinks that the new ruling will undoubtedly affect both employees and payers through an increase in premiums.

More utilization predicted

The IRS controls the tax-advantaged accounts, which makes no sense, according to Randy Vogenberg, principal, Institute for Integrated Healthcare, a consulting firm.

"If employees cannot be reimbursed for OTC drugs without a prescription, that will increase medical costs as they use more medical services such as office visits," he said. "The argument for the new ruling is that if OTC drugs are too easy to acquire, patients might hoard medications or resell the drugs."

By some estimates, exclusion of such drugs could save the federal government millions that could finance the increased outlays for new PPACA provisions.

OTC card for MA members

Medagate Corp., a provider of healthcare benefit solutions located in Redwood City, Calif., and InComm, a gift-card processor based in Atlanta, offer a program to promote access to OTC drugs. OTCNetwork is a national, OTC benefits program for Medicare Advantage members. Medicare Advantage plans can load dollar amounts to cover monthly OTC Medicare benefits onto debit cards that they distribute to their members for point-of-sale use. Two plans, Health Plus Elite and Access Medicare, as well as pharmacy partners Duane Reade, Fred's, and Rite Aid, are participating.

According to Medagate President Devin Wade, more than 11 million Americans are enrolled in Medicare Advantage plans, which provide $5.5 billion in OTC Medicare benefits annually, based on an average of $40 per member, per month.

"Yet only 4% of those benefits are actually used each year, because plan members do not have convenient access to their benefits for use in self-care," he said.

Without the new network, Medicare Advantage beneficiaries have to apply for reimbursement for OTC drugs, which often requires a prescription, Wade said. "The OTCNetwork promotes the appropriate use of OTC drugs and helps reduce costs."

Through the OTCNetwork, members can go directly to a pharmacy and swipe their cards to cover Medicare-eligible items for use in self-care only. The retailer separates noneligible products bought at the same time, and the beneficiary is responsible for the full cost of those items.

Editor's note: For more on this subject, see related story, "Medicare Advantage OTC card arrives," also published January 15, 2011.