A Hidden Cost of National Health Care

Abstract

Health flexible spending or reimbursement accounts (HFSAs) allow employees with qualifying plans to place untaxed money in an account from which they can pay a variety of medical expenses that are not reimbursed by insurance. Employees typically seek reimbursement for insurance deductibles and copayments, noninsured medical needs such as dental and vision expenses, and over-the-counter (OTC) drugs. These accounts financially benefit both employers and employees through tax savings. Money deposited in HFSAs by employees is pre tax. Thus employees can pay for qualified medical expenses without ever having had to pay taxes on that money. Depending on the tax bracket of the employee, the use of an HFSA translates to employee savings of approximately $1 for every $3 spent on qualifying expenses. “For example, a person in the 15% income tax bracket who makes the average contribution of $1208 into an [H]FSA saves roughly $274 in taxes, while someone in the 35% tax bracket saves about $438.” In addition, the employer does not pay payroll taxes to the government on moneys put into these accounts. And any money that remains in the account at the end of the year is given to the employer, essentially as a windfall. The enactment of the new national health care act— the Patient Protection and Affordable Care Act—limited the upside of HFSAs. Where employers were able to set the maximum (if any) their employees could apply to HFSAs, under the health care act, employees will be limited to an annual amount of $2500 for their HFSAs. Moreover, employees will only be able to draw from HFSAs to reimburse the cost of OTC drugs if the employees, oxymoronically, have prescriptions for them. Somewhat arbitrarily, also, the health care act does not require a prescription for medical equipment such as test kits, crutches, and bandages. Congress and the president imposed these limitations on HFSAs to assist in paying for the expanded health coverage of the health care act. “The cap is expected to raise $13 billion for other government-provided health care services offered between 2013 and 2019.” These changes are unfortunate. First, this is a far less-than-transparent method of arbitrarily shifting the costs of paying for expanded health coverage. And these costs disproportionately impact the working class, who are most likely to use HFSAs. Second, notwithstanding that the health care act was said to create more efficiencies in health care, this provision does exactly the opposite. If patients will be paid (through reimbursement) for going to the doctor to get a prescription for medicine designed not to require a prescription, many of those patients will understandably undertake exactly that unnecessary action. Those patients seeking reimbursement for OTC drugs through prescription effectively will be taxed the cost of the doctor’s visit (both actual and opportunity costs) for that privilege. And those patients who do not seek a prescription for OTC drugs will be financially penalized by not being able to access their HFSAs for buying nonprescription drugs without a prescription. If OTC drugs are to be dispensed without a prescription—a decision made by medical experts—this policy should not be undermined by bureaucratic pronouncements designed to further diminish the amount employees can be reimbursed through HFSAs in addition to the new $2500 cap. Moreover, given that currently we are worried about the limited availability of medical care, forcing patients into the overburdened system, when they don’t need to be, is hardly money well spent. Why are OTC drugs designated for special negative attention when crutches, bandages, and ovulation test kits—to name a few—are not? Undoubtedly, OTC drugs serve an important purpose in health care. If the answer is that the health care act effectively taxes OTC drugs because they offer the best opportunity to increase revenue, then the legislators should be more honest about their actions. Perhaps supporters of these provisions believe that HFSAs are obsolete or unnecessary and are using this health care act to surreptitiously eliminate them. I don’t Author Affiliation: University of Arkansas at Little Rock, William H. Bowen School of Law. Correspondence: Robert Steinbuch, JD, MA, Professor of Law, University of Arkansas at Little Rock, William H. Bowen School of Law, Little Rock, AR (resteinbuch@ualr.edu).