Both the House and Senate health care bills contain an unwelcome surprise for those whose current health care plans allow “flexible savings accounts” for out-of-pocket medical expenditures. FSAs enable people to spend pre-tax dollars on medical expenditures, including doctor visit co-pays and drug costs. Money is deducted from an employee’s paycheck, pre-tax, and placed in a separate account that can only be used to reimburse for medical expenses incurred over the course of a year.
In 2003, the federal government concluded that FSA dollars could be used for over-the-counter medicines. This was a boon for consumers, and helped reduce health care costs by making it less expensive for many consumers to substitute less expensive OTC remedies for prescription drugs. In my own case, it was much cheaper for me to use a prescription allergy medicine than an equally effective OTC drug because my drug co-pay was lower than the cost of the OTC product. Allowing FSA reimbursement for OTC drugs helped close the gap. It was also a major benefit for families, as expenditures on things like Pedialyte and pre-natal vitamins were also eligible.
This is all going to change if the current health care bills become law, however. As John Berlau reports, both the House and Senate bills would restrict the use of FSAs (and Health Savings Accounts) to prescription drugs and insulin. This will be a boon to drug makers insofar as prescription drugs are more profitable than OTC medicines, but could increase medical costs for many Americans — and is also likely to increase health care costs overall.
This sort of thing is nothing new. In 2005, Pfizer began supporting greater regulation of pseudophedrineto force it behind the pharmacist’s counter, just as it prepared to market products containing a less-effective alternativephenylephrine (PE) ahead of its competitors. The profit motive may induce drug companies to develop life-saving (and profit-making) medicines — and that’s a wonderful thing — but it is also encourages efforts to game the regulatory system. In this case, a small shift in the rules for FSAs allows drug makers to gain at consumer expense. Alas, I doubt it’s the only corporate goodie stuffed inside the health care overhaul.
Sara says:
How is an FSA an insurance plan? It has never seemed to me to be one. There is no contract of insurance and no risk shifting to another.
[Good point. I'll strike the word "insurance." JHA]
December 26, 2009, 9:22 amBruce Hayden says:
I don’t see how this is a surprise for any of us. And, I see it as prima facie evidence that ObamaCare was never about bending the cost curve down. Of course, that malpractice tort reform was never on the table was further evidence of this.
It has always been about control of that 1/6 or so of the economy, and never about any of the stated goals. Pretty much all of the original goals and putative solutions to problems have been sacrificed on this alter, just to get something passed. Heck, even getting all those uninsured insured by the rest of us has taken a back seat.
December 26, 2009, 10:22 amMario Rizzo says:
The most important effect of the limitation (both in scope and in total dollar amount) of FSAs is the reduction in medical options. Most insurance plans have in-network and out-of-network doctors and facilities. If you want to go out of network coverage is usually poor. The FSA enables people to choose out-of-network doctors on closer to the same basis as in-network. In addition, if you have relatively poor dental insurance — as most people do — you can draw on the FSA to pay the bills. I blogged about this here: http://thinkmarkets.wordpress.com/2009/11/12/healthcare-constructivism-a-view-from-my-window/
December 26, 2009, 10:25 amDave N. says:
I also understand (and will be grateful if I am wrong) that both the House and Senate bills limit the maximum amount of an HSA to $2500 (down from the current maximum of $6000).
I think HSAs have been a great benefit — and since you have to spend the money or lose it, it requires me to spend the money on things that benefit my family’s health.
December 26, 2009, 12:00 pmTodd says:
I switched employers last year (from one large corporation to another). My new employer has HSAs tied to High Deductible Consumer-Driven Health Plans as the preferred option, which I selected. In a nutshell, I put pre-tax money into an account, which is partially matched, I think at a 1/5 ratio, by my employer. I pay for ALL my healthcare expenses up to an annual limit. The insurer still negotiates preferred rates with doctors and pharmacies, but I am free to go in or out of network. There are no co-pays or deductibles. I pay for everything until the account is exhausted, at which point the insurance company takes over. However, if I do NOT spend what is in the account within a year, the balance is mine to keep for retirement. It says in an IRA-like account that I can invest.
My company has had its health costs grow at about half the national average since moving to this plan. It took some getting used to on my part. But now I am incentivized not to overspend. Preventive care is still covered 100% by insurance, so I am not incentivized to skimp on that.
The irony is, both the House and Senate bills will regulate these plans out of existence.
Why?
December 26, 2009, 12:13 pmDave N. says:
I thought the push to put pseudopehdrine behind the counter was based on pseudophedrine being a major ingredient in methamphetamine and, as a result, a desire to make it just a tad harder for meth manufacturers to get.
[That's true. Up until 2005, federal Pfizer opposed such restrictions on pseudophedrine, and was largely successful, except in a handful of states. In 2005, Pfizer switched, and federal legislation soon followed. JHA]
December 26, 2009, 1:28 pmTatil says:
I don’t like HSAs, as the money has to be spent or forfeited by the end of the year. A lot of people end up with money that they have to spend or lose at the end of the year. This is a recipe for inflating medical spending. Besides it is only available if your company is big and savvy enough to set up such an option. Wouldn’t it make this unfair for low income people? I would much rather they come up with a system with a lower annual limit, but where the money is not forfeited if it is not spent during the year and it is not through employers.
In any case, I doubt HSAs reduce medical costs at all. I don’t know anybody who drop by the doctor for the fun of it just because the cost is low. Insurance companies negotiates on behalf of the insured by removing the high cost providers from their network and I am pretty sure they exert a more effective pressure on providers to charge less.
December 26, 2009, 1:34 pmARCraig says:
Minor linguistic nitpick: Why “prescription drugs and insulin”? I’ve been a diabetic since I was 13 and as far as I know insulin is a prescription drug. I’m fairly certain I couldn’t buy it OTC. And as much as I disdain the overly restrictive American prescription system, this classification in and of itself seems rather rational given than insulin can be an abused drug, in that people sometimes use it to deliberately induce hypoglycemia (an extremely unpleasant sensation from all my many experiences with it, not to mention deliberately inducing it is absurdly dangerous).
December 26, 2009, 1:46 pmMario Rizzo says:
A word of clarification. A Flexible Spending Account is not the same thing as a Health Savings Account. The latter are portable and you can keep unused money from year to year. It is usually associated with high deductible insurance plans. I do not know how the HSAs are affected by the new bill(s). The FSAs are far more widespread and had much higher limits of contributions. It is true that they might encourage more use of medical care but they also provide more options. The use-it-or-lose it feature is very bad, I agree.
December 26, 2009, 1:49 pmDoug says:
Its a shame about HSA. My wife has had flex account and for the last few years has had a health savings account. We use the HSA to pay for my daughter’s speech and OT therapy that the insurer won’t pay for. It allowed us to use it for a lot of things. I am cynical, in that it is all about power and control.
December 26, 2009, 2:42 pmMike says:
Can FSA’s still be used to purchase hearing aids and medical devices under the proposed reforms?
December 26, 2009, 5:02 pmMike McDougal says:
I’ve always doubted that motivation. My understanding is that the vast majority of meth comes from “superlabs” in Mexico, where annoyances at CVS and Walgreens are irrelevant.
December 26, 2009, 10:51 pmDoug says:
There are/have been a lot of small meth labs busted in Wisconsin that obviously were making it right here. A decrease in the number of meth labs has been noted which may fairly be attributable to the difficulty of obtaining the main ingredient.
December 27, 2009, 8:43 amARCraig says:
Doug-
The number of breweries in Canada increased during Prohibition, also. Hardly makes the 18th Amendment a success.
December 27, 2009, 2:14 pmmarkm says:
Mike: Psuedoephedrine regulation has been “successful” if you define that as replacing those mom-and-pop meth brewers with large illegal plants in Mexico, run by machine-gun toting gangsters. It seems to me that the net effect of that change is to increase the danger to the public. Just like the first Prohibition, when gangsters could fill up a a whole convoy of vehicles with Canadian liquor – quite legally, until they returned across the border – and carried on car to car gun battles at high speeds in the streets of Detroit.
And we were all a heck of a lot safer back when it was easier to divert prescription amphetamines (of consistent quality, made in regulated plants run by qualified chemical engineers) to unapproved uses than to import them illegally or brew your own…
December 27, 2009, 7:57 pmKenneth Almquist says:
Alder links to a piece in which John Berlau quotes section 9004 of the Senate bill as saying that distributions from tax excempt medical accounts are “qualified only if for prescribed drug or insulin.”
Following the link to the Senate bill reveals that section 9004 actually concerns the tax treatment of funds which are withdrawn from HSA or MSA accounts but are not used to pay medical expenses. Doing a text search of the bill reveals that the phrase “qualified only if for prescribed drug or insulin” does not appear anywhere in the bill. Searching for the word “insulin” reveals that it only appears in section 9003, so presumably that was the section that Berlau was misquoting.
Section 9003 says that for FSAs:
Similar language applies to HSAs and MSAs. The parenthetical was presumably included to ward off the possibility that the term “prescribed drug” could be confused with the term “prescription drug.”
So if Johnathan Adler wants his FSA to cover his allergy medicine in the future, he will need to consult a doctor about which allergy medication to take. Once the appropriate medication is selected and the doctor writes a prescription, the medication will covered by the FSA regardless of whether the pharmacist is allowed to sell the drug in the absence of a prescription.
December 27, 2009, 9:40 pmSnaphappy says:
I think you’re overly simplifying the interests at stake here. Prescription drugs include not just name brands but also generic manufacturers, and OTC products are often produced by the same companies as the prescription drugs. Your prescription medicine was probably cheaper than the OTC drug because it was a generic, and thus did not benefit a pioneer drug manufacturer.
You’re also not likely a typical consumer. Most people would not do the cost/benefit of their prescription drug versus an “equally effective” OTC drug. Most people take either the OTC drug that they find out about and try because of TV commercials, or the Rx drug that their doctor prescribes. The cases in which there is a meaningful choice between an Rx drug and an “equally effective” OTC drug are few in comparison.
December 28, 2009, 11:16 amathEIst says:
RE:, Pseudoephedrine. Yeah and now you get to put down your name and DL and write a short paragraph on how THE WAR ON DRUGS is great(like someone looks at that book). Don’t worry about mom and pop though because after the big truck with Pseudoephredrine arrives and the meth is cooked up a distribution system is still necessary. How’s your allergy–the Phenylephedrine doesn’t work!?
May 3, 2010, 2:17 pm