Healthcare reforms may cut OTC items from flexible spending accounts next year

ALEXANDRIA, Va. —This may be the last year that flexible spending accounts can be used to supplement OTC medicine purchases, as one of the healthcare reform proposals under consideration in Congress includes a provision to remove OTCs as eligible FSA purchases.

The suggestions around removing OTC purchases as FSA-eligible expenses are being made as one possible way to help raise the revenue that will supplement the expected costs associated with healthcare reform. Reversing the 2003 IRS decision to include OTC medicines as eligible expenses under FSAs or eliminating the FSA program entirely effectively makes those medicinal purchases taxable again.

However, a recent announcement from the National Community Pharmacists Association may help to quantify the growing utilization of FSAs among Americans.

NCPA last month introduced a new service—the FSAok AutoCopay—that enables community pharmacies to continue serving patients who use flexible spending account debit cards within new IRS regulations.

As of July 1, those regulations precluded customers from using their FSA debit cards at drug store retailers that had not secured an Inventory Information Approval System, a point-of-sale system that’s able to identify eligible healthcare FSA purchases by comparing the purchased items’ UPC or SKU number against a pre-established list of eligible items; keep a separate total for the eligible items; and charge the FSA card only for the eligible items total while requesting another form of payment for any remaining items.

“We were pleased late last year when, after meeting with NCPA, the Internal Revenue Service extended the deadline [for the new requirement] from Jan. 1 to July 1, 2009,” stated Bruce Roberts, NCPA EVP and CEO. “During that time, NCPA responded to the needs of our members by collaborating with Finpago’s FSAok AutoCopay service to offer a low-cost solution requiring no special software or POS system so that they can continue to serve their patients with FSA accounts with an automated copayment claims service and real-time substantiation of eligible over-the-counter transactions,” Roberts said.

For pharmacies without point-of-sale systems, AutoCopay makes it possible to accept payment from customers who use FSA debit cards in accordance to IRS regulations.

“The average pharmacy sells more than $60,000 per year to customers with flexible spending account debit cards,” stated Finpago CEO Fred Hawkins. If the average pharmacy sells more than $60,000 per year in OTC products under an FSA plan, then industrywide, that means retail pharmacy captures some $3.3 billion in FSA-related sales per year.

Pair that sales figure with the fact that 14.8% of American households have an FSA, according to the National Center for Health Statistics, and you get 16.5 million families saving pre-tax income dollars on some $3.3 billion in sales across more than 55,000 retail pharmacy outlets. That’s a burgeoning market of some consequence that has been utilized at greater rates, thanks both to the inclusion of OTCs and the convenience of FSA debit cards.

In addition to the ease of use associated with FSA debit cards, many plans have adopted a two-and-a-half month annual grace period that extends utilization of FSA-type plans out to March 15 of the next year. For 2010 FSAs, that would mean participants can draw from that account through March 15, 2011.

According to the U.S. Bureau of Labor Statistics, as of March 2007, 33% of all workers participated in an FSA. Geographically, the Texas-area, Pacific regions and the Mid-Atlantic have the fewest participants (25%, 31% and 31%, respectively) while the New England and central Northwest have the greatest number of participants (37% and 40%, respectively).