This is the transcript of my recent podcast interview on how health reform is affect Flexible Spending Accounts.
David Williams: This is David Williams, co-founder of MedPharma Partners and author of the Health Business Blog. I’m speaking today with Jody Dietel. She is president and Chair of the Special Interest Group for Inventory Information Approval Systems Standard (SIGIS). Jody, it’s nice to speak with you today.
Jody Dietel: Thank you. Nice to speak with you.
Williams: Starting with the basics, what is an FSA?
Dietel: A Flexible Spending Account or FSA is one of several consumer directed accounts whereby employees can set aside some pre-tax dollars to pay for out of pocket health care expenses that they already know they have. These include office visit co-payments, prescription drug co-payments, over-the-counter medications, dental, vision –all sorts of expenses.
Williams: Have FSAs been well utilized?
Dietel: Yes, there are about 35 million households with Flexible Spending Accounts today. Yet I would say it’s also an underutilized benefit. Many employees have the opportunity to participate but for whatever reason it’s just an underutilized benefit much like 401K was in the early years.
Williams: The new health reform law is quite sweeping in its scope. Although most people focus on big topics such as mandates to purchase insurance and medical loss ratio requirements, I understand that there are some changes afoot for FSAs as well. Can you explain those?
Dietel: The Affordable Care Act does impact many of the consumer directed accounts. The changes that I’m going to describe first also affect employer funded Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) as well. The Affordable Care Act requires that beginning January 1st, any purchases for over-the-counter drugs and medicines will require a physician’s prescription in order to be covered under a health care Flexible Spending Account or other types of consumer directed accounts.
The wording is very specific, yet we’re looking for additional guidance from Treasury. We can’t really believe that they meant a prescription with a capital “P,” which would have to be filled by the pharmacist. That kind of thing would really add a burden to the health care system. We think they mean a Black’s Law Dictionary definition of a physician directive. In other words I have acid reflux and so my doctor tells me to take Prilosec OTC on a daily basis or something like that.
Williams: I suppose in the worst case it could mean that you pick up that over-the-counter product from the shelf and then actually take it back to the pharmacist. The impact could be that an over-the-counter product becomes essentially a behind-the-counter product.
Dietel: Assuming Treasury guidance is reasonable –and we expect it will be– I think it’s more likely that before you buy an OTC medicine or drug that you want to have covered under one of these consumer directed accounts or your health plan, you’ll need to just make sure that you’ve talked to your doctor about it.
It will have to be made clear that you have a specific condition and they’ve told you to take or consume that particular OTC item to address the condition that you have. So we’re looking for it to be not an onerous thing. I think that putting OTC drugs and medicines behind the counter doesn’t make sense. It would add a layer of complexity that wouldn’t be reasonable in the system.
Williams: What’s the logic for introducing this change though in the first place? Even if it’s not onerous it still is an additional step and an additional cost and an additional thing for people to do.
Dietel: That’s a very good question. The only thing we’ve been able to understand during our extensive conversations on The Hill is that everyone needed to chip in some money to pay for health care reform. This was viewed as a way to raise about $5.4 billion over ten years. That’s assuming that consumers don’t follow the directive to get their physician to direct them to take their medicine. We think the figure is overstated, but I think that’s simply a revenue grab to pay for health care reform.
Williams: Now at the nitty gritty level, what impact does this have in terms of how a pharmacy sets things up or how somebody is administering the benefit? What are the downstream issues?
Dietel: That’s a really great question. The SIGIS Association, the Special Interests Group for IIAS Standards is really concerned about this change because over the past several years the IRS has issued guidance that allows for the use of a debit card in many of these consumer directed accounts. Today, in most cases, consumers can go to the drug store or their supermarket, purchase an over-the-counter item (an over-the-counter medicine or drug), and that item is automatically paid for with a debit card. Funds come directly out of their account and in most cases there is no further need for substantiation.
So this change under the Affordable Care Act is really three steps backwards. Essentially what it means is that you will no longer be able to use your card to purchase these items because the card doesn’t know whether or not you’ve had a discussion with your doctor and they’ve given you some sort of written directive or prescription to take the over-the-counter drug and medicine. It’s also important to note that this really only affects about 35% of the items that are considered over-the-counter items. So you can still buy Ace bandages, Band-Aids, gauze pads, reading glasses, wheel chairs. There is a whole host of over-the-counter items and again about 65% of the list that is in existence today will still be available for the cards’ use.
Williams: Okay but now you’re going to have to split up your order. You’re going to have some things that you can still use your card for but then you’re going to have to take money out of your pocket and go through reimbursement like in the olden days?
Dietel: Yes, that’s correct.
Williams: So you also mentioned I think January 1st as a time for implementation here. Will people be ready in time for that?
Dietel: Actually no. In fact, we’ve talked to the Treasury Department and issued a letter that requests a delay or basically a non-enforcement period. January 1st is a horrible time of year for the retail community. Many of our members are merchants. Essentially this rule asks them to, overnight, December 31st to January 1st at the busiest retail season of the year, during a time where many retailers have historically had a blackout period against IT changes, to make this really substantial change.
So we’re asking Treasury and the IRS to consider the impact on the retailers and the economy. Despite our best communication efforts, I think that participants are going to be very confused, because essentially, something that they purchased with their card on December 31st will no longer be able to be purchased on January 1st. We know the retailers won’t be able to consistently apply that and so even worse, a participant’s experience will differ from retailer to retailer unless we get this extensive guidance from Treasury and some relief from the arbitrary date of January 1st.
Williams: It does sound like a mess. Do you have any sense yet of whether Treasury is sympathetic to your arguments and whether they can actually do anything about it even if they are?
Dietel: I’m not sure that there is anyone who has a real sense. I can tell you that they’re very interested and empathetic to our concerns. We have had telephone conversations with them following our letter and I think that arguments that we made were sound and were really appreciated by the Treasury folks. The only word on the street is that we’ll see guidance sooner rather than later, whatever that means. We’re hopeful that that does mean in the next three or four weeks or so.
Williams: What should employers and consumers be doing now?
Dietel: I think that employers definitely need to start communicating with participants that there is a change. About five or six years ago the change to allow over-the-counter drugs was made because these drugs are considered safe by the Food and Drug Administration. In many cases it’s far less expensive for consumers to self-medicate through the over-the-counter process without the prescription drug/pharmacist process. And it’s certainly far cheaper for our health care system.
We need to start communicating with consumers today that there is a change on the horizon, that we are expecting additional guidance and that we’ll get that guidance out to them as soon as possible. But I think we’re in for a wild ride over the next few months until the end of the year and then when this change really takes place.
Williams: If you look ahead another year or two when this transition has passed one way or the other, do you expect that FSAs will have an ongoing role under health reform or will they gradually fade off?
Dietel: I really believe that Flexible Spending Accounts and other consumer directed accounts are part of the solution and not part of the problem. Every single person’s health status and health needs are different and the reality is that under the Affordable Care Act there still are substantial out of pocket costs and cost sharing with participants.
The Flexible Spending Account is one of the only tools that puts the participant in the driver’s seat. Milton Friedman, a noted Nobel Prize winning economist said, “No one spends someone else’s money as carefully as they spend their own.” And so the whole idea is personal engagement, personal responsibility –that you and I can control much of our health care costs in America because of our own health status and taking better care of ourselves. What we’ve found is that people who participate in a Flexible Spending Account or other consumer directed account actually have lower health care costs, have better compliance with treatment regimes and are healthier people. So I believe they have a very, very strong role in solving the health care ills of our country.
Williams: I’ve been speaking today with Jody Dietel about Flexible Spending Accounts and some of the changes that are coming under health reform sooner rather than later. Jodie, thanks very much for your time.
Dietel: My pleasure, thanks David.July 26, 2010