ObamaCare Restricts FSAs, HSAs

Since 2003, consumers could use pre-tax dollars in flexible spending accounts and health savings accounts to buy over-the-counter drugs. And we're not talking about a meaningless few. In fact, I bet most of what's in your medicine cabinet right now is on the list (PDF). The OTC rule translated to hundreds of dollars in savings each year for consumers with an FSA or HSA.

I have a small FSA through work and because I never go to the doctor, I use that money almost entirely for paying for things like Claritin, Tylenol, Neosporin, bandages, and Tylenol PM. If ObamaCare passes, no longer.

But Section 9004 of the [] Senate bill and Section 531 of the House bill that passed in November changes the tax code so that “distribution for medicine” from HSAs and FSAs are “qualified only if for prescribed drug or insulin.” Yes, the bills are merciful enough to allow diabetics to purchase insulin under these tax plans, but if you or your family members need Pedialyte, prenatal vitamins or numerous other over the counter health items, you will see a tax hike that could be huge.

Since HSAs and FSA contributions are exempt from both income taxes and 15.3 percent payroll tax for Social Security and Medicare, and since these together can reach more than 40 percent of an employee’s salary, the effective tax increase on these medicines could be more than 40 percent.

And this tax change will almost certainly cost the health care system billions more dollars in unnecessary spending both to the government and private insurance plans. The Joint Committee on Taxation estimates that the tax hike will bring in $5 billion in revenues over ten years – itself a drop in the bucket when compared to the bill’s new trillion-dollar entitlement – but that estimate doesn’t take into account behavioral changes as a direct result of this provision.

OTC drugs are much cheaper those available for prescription, but they could now be more expensive to individual consumers given that prescription drugs would still be eligible for favored treatment in the tax plans, and that insurance companies would be mandated to cover many of them. Consequently, any time a consumer has the slightest headache, the financial incentive would often be to see a doctor and get a prescription rather than go to the store and get medicine off the shelf.

In other words, Obama is bending the cost curve...up.

posted by Gabriel Malor at 12:10 PM

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