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The Right Prescription
Over the Counter Goes Under
Obamacare's tax on middle-class medicine cabinets needs to be scrapped.
"They won't be so opposed to it once they see what's in it." That's the rationalization House leaders had given skittish Democrats to get them to walk the plank on Obamacare last month.
But one of the first things millions of Americans will "see" is an effective 40 percent tax hike on the over-the-counter medicines -- from an antihistamine such as Claritin for allergies, pain relief medicine such as Tylenol or Excedrin, Pedialyte to prevent their kids from becoming dehydrated when they are sick, and even prenatal vitamins if they are expecting another one.
All of these items have two things in common. One is that they are classified as "over the counter" (OTC) medicines and available without a doctor's prescription. The other is that if you pay for any of these items with money in your flexible spending account (FSA) or health savings account (HSA) -- and according to this guide (pdf) from FSA administrator Benesyst, all of these are eligible expenses -- you will face an effective tax increase of up to 40 percent on these items in the health care bill that President Obama signed last month.
The bill restricts individuals with these pre-tax accounts to buying a "medicine or drug only if such medicine or drug is a prescribed" one. And ironically, this tax will raise health care costs substantially by creating incentives for the use of more expensive prescription drugs even when OTC drugs are just as safe and effective.
And while the tax on "Cadillac" plans for union members was delayed in the reconciliation bill until 2018, no such luck for HSA and FSA account holders, many of whom are self-employed and entrepreneurs. These heath care consumers and voters -- and there are more than 40 million of them according to the Washington Times -- will still "see" this tax hike go into effect at the beginning of 2011.
Both FSAs and HSAs allow Americans to pay for medical expenses with pretax dollars. An HSA goes along with a high-deductible insurance policy and gives individuals a tax deduction for money saved that can be used for health care expenses. An FSA has similar tax advantages, but contributions to it are deducted from an employee's salary, and money in the account must be used by the end of the year.
In 2003, the Treasury Department and the Internal Revenue Service ruled that OTC medicines could be paid for by FSAs and the newly enacted HSAs. In a press release that sounded unusually compassionate for the IRS, the agency stated:
"Drugs are increasingly becoming available over-the-counter without prescription. Many health plans no longer cover the cost of these drugs as over-the-counter. While an over-the-counter drug is less expensive than the prescription drug, the cost to many consumers increases because the price paid by the consumer for the over-the-counter drug is greater than the co-payment by the consumer when the drug was covered by insurance. This is especially an issue for individuals who remedy chronic health problems by regularly taking an over-the-counter medicine."
Then-Treasury Secretary John Snow added in the release, "Since many prescription drugs have moved to the over-the-counter market, this action today makes paying for them a little bit easier to swallow."
Specifically, the government ruled that since the tax code written by Congress did not specifically require that "only medicines or drugs that require a physician's prescription be taken into account" for health expenses, OTC medicines were eligible. The ruling made clear that although health accounts could not purchase items for general health such as toothpaste, they could be used for medicines that treat specific conditions, such as an "antacid, allergy medicine, pain reliever and cold medicine." Companies that administer FSAs and HSAs have developed extensive lists of a variety of OTC items that are covered. The Benesyst guide fills two pages with an alphabetical list of eligible expenses that includes everything from analgesics to wound care.
But Section 9004 of the Senate bill the House ratified that Sunday night in March, as well as Section 531 of the original 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.
This could mean that billions will be wasted on the additional costs for prescription drugs in instances when OTC medicines could be just as safe and effective at treating the illness. A 2005 study in the American Journal of Managed Care found that the Food and Drug Administration's clearing of antihistamines such as loratadine (Claritin) for over-the-counter sale saves about $4 billion a year in health care costs. Ironically, the liberals and Democrats who normally rail against big pharmaceutical companies are now creating a huge windfall for the firms that make expensive prescription drugs by penalizing users of OTC medicines.
The rallying cry for opponents of Obamacare has been "Hands off my health care." In addition, they now could say, "Hands off my medicine cabinet." The fight could begin as soon as Congress reconvenes next week. A smart politician could introduce an amendment to multiple bills strike the medicine cabinet tax from the health care law, arguing that under dynamic scoring which takes into account behavioral changes of taxpayers, the tax would cost the government more. If they need something else to pay for this fix, they could always scrap Obama's costly repairs to a certain "Cadillac" of his constituency.
About the Author
John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute and blogs at OpenMarket.org.
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Sam| 4.9.10 @ 7:06AM
Oh the tangled web we weave when we seek to deceive!
Congrats to Obama and crew for yet another mess from paying off their cronies with public funds while seeking to pretend to "help" the masses.
Purpleguy| 4.9.10 @ 9:41PM
Prescriptions are paid for .... HSA and FSA are gone... in lieu of healthcare for all .. oh, well, enjoy!
Drew| 4.9.10 @ 7:12AM
Quote: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.
This has to be the silliest assertion on American Spectator all week.
First, it assumes that a physician is going to write a prescription for someone showing up with a headache. Any Doctor that writes a scrip for Vicodin or Oxycodene for a patient presenting with a simple headache is the sort of physician who needs to lose his license.
Secondly, it assumes that a patient is going to be able to walk into a doctor's office the minute a headache appears. (Have you tried that recently?)
And since most physicians offices are typically open during business hours, what headache sufferer in their right mind is going to take either a vacation day, or unpaid time off, simply to save themselves a tiny bit of tax on a $5 bottle of Bayer aspirin? To say nothing of enduring the pain for several extra hours while they wait for the appointment.
The money that employees put into Flexible Savings Accounts is almost universally used for things like co-pays, deductibles and prescriptions. And frankly, anyone who WAS using FSA money for OTC vitamins and skin cream was abusing the system.
You know you're running out of arguments once you start blathering about the horrors of people being forced to pay for their own aspirin and dandruff shampoo.
Mary| 4.9.10 @ 8:43AM
I am an auditor and one of the things we look at is cafeteria plans/FSA's. The statement you made about people abusing the account by using their over the counter medicines is preposterous. A good portion of employees enrolled in these plans use them for OTC medicines. I would suggest you not comment about matters you that you seem so clueless about.
Democrats claim to be for the middle class but they are constantly trying to destroy it. The rich will always have the means to take care of their health-care needs and the poor have always had access to health care; yet, the people in the middle class will be the hardest hit by this plan. Which is what the ruling class intends.
Troll Watch| 4.9.10 @ 9:20AM
"I would suggest you not comment about matters you that you seem so clueless about."
Are you suggesting Drew or Jeremiah or the Liberal reader take a vow of silence and never speak again. That is very unfriendly. Fascists need friends too.
pugsley| 4.9.10 @ 12:15PM
Amen Mary and well said.
Purpleguy| 4.9.10 @ 9:45PM
You are wrong - buying Aspirin or other OTC drugs are NOT allowable by the IRS as part of your medical deductions, and therefore NOT part of reimbursement using HSA or FSA funds. Anyone who does that is abusing the system - which I guess you think is okay... hmmm - so we all pay more so you can buy OTC drugs? Stop it.
Nick| 4.10.10 @ 2:30AM
Pay no attention to PurpleJackass folks.
He doesn't even know that Virginia governors don't run for re-election because they can only serve one term, then have to wait 4 years to run again.
He also likes to berate others for spelling "hypocrisy" wrong, and in the same post he wrote "hypocrit", like a moron.
He is not worthy of debate with grown-ups.
Dai Alanye| 4.9.10 @ 12:43PM
"Secondly, it assumes that a patient is going to be able to walk into a doctor's office the minute a headache appears. (Have you tried that recently?)"
If Drew weren't so consumed with making a point in favor of Obamacare he'd recall that emergency rooms offer immediate treatment, and that many people already take undue advantage of them.
Drew| 4.9.10 @ 12:57PM
If you are seriously suggesting that someone with a headache is likely to go to an emergency room, just to save the fraction of a cent in extra income tax a non-FSA aspirin costs - then there's not much point in discussing things further. Run with it.
Nick| 4.9.10 @ 2:05PM
Hey everybody, it's Drew, the Molech worshiping progressive troll!
Mike| 4.9.10 @ 4:27PM
Hey, Drew...have you ever heard of hyperbole? The writer is making a point.
Drew| 4.9.10 @ 10:36PM
Quote:The writer is making a point.
Yes, he is: He's whining that he won't be able to get his a tax subsidy on his purchases of Preparation H. (Substitute vitamins, acne cream, Immodium, denture powder, etc. etc.)
In short - he'll have to pay the same out of pocket cost for Bayer aspirin, Nyquil, or a box of Bandaids as those people who don't happen to have an employer-sponsored FSA do.
And that's what is is so pathetic about this whole line of argument: People who get their health insurance through their employer (subsidized through the tax code) complaining about a law that lets people who buy their own health insurance get a similar subsidy.
Michael Smith| 4.10.10 @ 8:27AM
Yes, he is: He's whining that he won't be able to get his a tax subsidy on his purchases of Preparation H.
It is vicious nonsense to suggest that permitting someone to purchase something with their own money is, in any way, "subsidizing" them. It is not. The mere fact that the government does not demand a cut of this money does not constitute any sort of transfer of funds TO the person doing the spending.
Only a stunningly ignorant, leftist, collectivist, looter mentality thinks that everyone's earnings actually belong to the government and that when government permits an individual to spend some of this money, it constitutes a "subsidy" that comes at another man's expense.
The fact is, my life and the fruit of may labor belongs to ME, not to you, Drew, not to the government and not to "society". And you don't have a right to a penny of my earnings of any part of my life at all.
So I say to hell with you and your power-lusting, Looter-in-Chief president. You both deserve to be deported to North Korea or Cuba or some similar stinking hole for advocating the destruction of our remaining freedom and the looting of our remaining wealth.
Alcina| 4.10.10 @ 3:06PM
You are so wrong Drew. That is exactly what people will do and already do. It's obvious that you are not in the medical field because it happens everyday in the ER. And will now get worse.
Kristy| 4.9.10 @ 5:57PM
I often go to the doctor and he will have me pick up some over the counter drug and take this much to make it prescription strength. If I were to only buy one bottle of aspirin a year, ok, so what that I cannot pay for it with my FSA. But, I, and many others, purchase many bottles of all kinds of over the counter medication each year and those extra taxes add up. (Frankly, I'm taxed enough already.) Why shouldn't I be able to pay for over the counter drugs out of my FSA?
And, how is it an abuse of the system to use my FSA money to pay for my OTC medications? I'm not taking your FSA money to pay for items I don't need, but since I get them for free, I take them anyway. That would be an abuse of the system.
Purpleguy| 4.9.10 @ 9:48PM
Because, deary, the law doesn't allow you to. You can run a redlight honey, or not report income on your tax return, but if you get caught, you're breaking the LAW. Geesh...
Purpleguy| 4.9.10 @ 9:46PM
A the light of logic is so antiseptic in the swamp of lies, deceit and fear.... Good post.
Brett| 4.9.10 @ 8:56AM
The problem with this change is not having to pay more for OTC, but rather having to be more careful about what you put in your FSA. Currently, you can look at it like, if there's $100 or $200 left in my FSA at end of the year, I can stock up on OTC. Now you won't have that option. So you'll have to be more careful that the entire FSA is used on copays, deductibles, etc. I'm much more upset about the $2500 limit. I put $4000 a year in. This limit will raise my taxes by ~$500 per year.
Purpleguy| 4.9.10 @ 10:01PM
If you have anything left over, put it in your IRA or 401K - that was one of the advantages of FSA or HSA. If you want tax advantage, put the difference between 2500 and 4000 in your retirement fund... Good Grief, what a whiner.
Angie| 4.9.10 @ 9:04AM
We have the flex accounts where I work but since I’m not on any prescription drugs, rarely need OTC medicines, and am generally healthy and don't see doctors often, I don’t participate. However, I have many coworkers that do and they use them for OTCs. Many allergy medications are now OTC and living in Austin which is one of the worst spots for allergies in the country, a lot of people use them for that. Now this isn’t a huge deal, but I think it’s important for people to be aware that they should now just pay for OTCs themselves instead of wasting money by continuing to use their flex plans. It’s important for people to know what’s in the bill so they can avoid being overcharged as every little bit saved helps.
Marie| 4.9.10 @ 10:37AM
You are so right Angie. But as indicated above, most people use these accounts for those such medications. However, as our esteemed speaker stated: "We have to pass this bill so we can see what's in it."
Now we are observing the consequences of blind subservience to the speakers wishes by her spineless lackeys and we are going to pay the piper.
Drew| 4.9.10 @ 6:20PM
What I find so puzzling is that so many "conservatives" (ie. supposedly the supporters of personal responsibility; lowered deficits; and private enterprise) seem to be all in an uproar about losing a Government subsidy to pay for their aspirin and bandaids.
Maybe someone can explain this contradiction.
Nick| 4.9.10 @ 6:51PM
Have you found out the evil deeds that Molech worshipers committed yet, Drew?
Google is hard to use, I know, but try it. You claimed you looked it up, but we know that isn't true.
And, "progressives" are still modern day Molech worshipers.
James| 4.9.10 @ 9:23PM
There wouldn't be a need for a subsidy if the government didn't tax it in the first place.
It's a classic statist ploy: argue for government taxation and regulation, and then claim that anyone taking advantage of the law is using a "subsidy". That's nearly as stupid as the joy people feel at income tax time when they get their own money back after lending it to the government interest free.
Purpleguy| 4.9.10 @ 10:03PM
Hilarious! Seems they don't mind being on the public dole when it's them ... The big problem is that I can't buy a tax free bottle of Aspirin? Are they serious? The health-care-reform bill made few changes to HSAs, but it did double the penalty for using the money for nonmedical expenses before age 65 -- from 10% to 20%. Be afraid, be very afraid.
Purpleguy| 4.9.10 @ 10:06PM
And, yet, you are typical of the type that wants the Government to spend hundreds of billions on the TSA ,the Armed Forces and other agencies to protect your ass, and then complain that taxes is to high .. whine, whine, whine. Pay your way and shut up. Be glad you CAN pay. You can't take it with you, bubba.
Nick| 4.10.10 @ 1:04AM
Pay no attention to PurpleJackass folks.
He doesn't even know that Virginia governors don't run for re-election because they can only serve one term, then have to wait 4 years to run again.
He also likes to berate others for spelling "hypocrisy" wrong, and in the same post he wrote "hypocrit", like a moron.
He is not worthy of debate with grown-ups.
Michael Smith| 4.10.10 @ 8:31AM
. . . losing a Government subsidy to pay for their aspirin and bandaids.
I'll say it again:
It is vicious nonsense to suggest that permitting someone to purchase something with their own money is, in any way, "subsidizing" them. It is not. The mere fact that the government does not demand a cut of this money does not constitute any sort of transfer of funds TO the person doing the spending.
Only a stunningly ignorant, leftist, collectivist, looter mentality thinks that everyone's earnings actually belong to the government and that when government permits an individual to spend some of this money, it constitutes a "subsidy" that comes at another man's expense.
The fact is, my life and the fruit of may labor belongs to ME, not to you, Drew, not to the government and not to "society". And this means that neither you nor the government have a right to a penny of my earnings of any part of my life at all.
So I say to hell with you and your power-lusting, Looter-in-Chief president. You both deserve to be deported to North Korea or Cuba or some similar stinking hole for advocating the destruction of our remaining freedom and the looting of our remaining wealth.
Jim| 4.10.10 @ 2:32PM
If a robber puts a gun to your head and demands only half of the money in your wallet instead of all of it, is he then "subsidizing" you for the amount you have left?
Pingback| 4.9.10 @ 10:54AM
Over the Counter Medicine a Victim of Obamacare « Stuck In The World, Making The Most links to this page. Here’s an excerpt:
MikeA| 4.9.10 @ 12:05PM
What will this do to those machines in public restrooms, that offer single dose aspirin, antacids, eye drops,etc..
Pete| 4.9.10 @ 3:34PM
Brings to mind a simple joke about why Obama plans to tax aspirin...
Lazy Jack| 4.9.10 @ 12:05PM
John, you should be careful or you may end up the Kangaroo Court of King Henry Waxman for saying the emperor has no clothes. I understand there is still time on the docket After Caterpillar and AT&T week after next. Seems like those that point out that the milk was curdled when it arrived are jailed while the milkman gets a party.
Lazy Jack
http://thanksforthelaughs.word.....he-waxman/
http://thanksforthelaughs.wordpress.com/
Pingback| 4.9.10 @ 12:19PM
The American Spectator : Over the Counter Goes Under « Gds44's Blog links to this page. Here’s an excerpt:
Radegunda| 4.9.10 @ 4:00PM
Anybody who thought this legislation was intended to make medical care more affordable and accessible was simply not paying attention.
purpleguy| 4.9.10 @ 10:08PM
Guess you had healthcare, huh? Weren't you paying attention - 30,000,000 more people now will have healthcare - just pay up and shut up. Be glad you can pay and don't be selfish... you can't take it with you, bubba.
Jim O'Brien| 4.9.10 @ 6:04PM
Congresswoman Suzanne Kosmas (D-FL) is running prime time ads on TV telling viewers "to thank Suzanne Kosmas for voting Yes" on ObamaCare. She wants viewers to be so happy that they will be paying a lot more for their health care, that they will re-elect her in November. And Kosmas is considered by some to be a "moderate" compared to her ranting fellow Congressman Alan Grayson (D-FL), who is also up for Defeat in November.
ben dover n,grabim| 4.9.10 @ 6:17PM
Eventually our paycheck will go directly to the US Treasury, who will then return a portion of our check to us. They will effectively own our house, will provide a car (if needed) from Government Motors(GM), allow us to breath and exhale a regulated amount of oxygen, and will have Acorn vote for us so we don't have to bother. Most of what I just wrote is already happening, think about it.
purpleguy| 4.9.10 @ 10:09PM
Typical fear mongering ... don't y'all have any new material?
Jim Hlavac| 4.12.10 @ 1:43AM
Yes, new material: Let people keep their own money. End sales taxes and all other taxes on medical things of any nature. Lower taxes of every kind and sort so people don't need subsidies. Get the government out of the healthcare system altogether. Cut wealth transfers to corporations, whether banks, cars or food production etc, and transfer those savings back to individuals. Get rid of mandates on states. Oh, I know, Purp, it's not "new" to you, for you are locked in the government knows best mentality, from what I can read. All you are doing, sir, is making things ever more co-dependent and regulated -- and thus requiring ever more finagling so that things somehow stay the same -- then everyone reacts to the latest bunch of laws, taxes, rules and regulations, requiring by your tried and true methods of ever more laws, taxes, rules and regulations. Just stop it. Stop it! It's absurd to have the government determine what is right to save, then right to spend, then right to produce or sell. It's an endless death spiral into the glories of socialism.
One nice thing -- it'll go bankrupt far faster than anyone imagines. And then what? Oh yeah, that "new" idea -- Let People Keep Their Own Money and Leave Them Alone. Try it, Purp, you might like it. But, sir, don't complain when the mush hits your fan, OK? You want this nutty situation, we don't -- do what you want, leave us out of your ministrations of ever more government involvement in every miniscule part and portion of our lives. Thanks.
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Wilfred| 4.9.10 @ 10:38PM
Purpleguy, ye know not of what ye spake.
FSA accounts can be used for OTC medications. At least, they could until very recently, because I had one for years & used it for this.
The problem with an FSA, though, is that it has to be depleted completely at year-end, or else the Gestapo will confiscate the balance.
An HSA is a better deal; it can be rolled over from year to year. This gives the consumer more control over paying for his own health care. And that includes buying OTC medications.
Which is why Mrs Pelosi & Mr Obama hate them so. The Gummint should be making these sorts of decisions for you, you know.
John S| 4.10.10 @ 9:54AM
Precisely.
Since the government has such a profound interest in our healthcare now, one would think they would encourage these purchases (even of vitamins), as people taking care of themselves now would help prevent costly doctor/ER visits in the future.
But this is government health care for you.. government first, and health care a distant second. Stock up now while you can.
Nick| 4.10.10 @ 1:48AM
Pay no attention to PurpleJackass folks.
He doesn't even know that Virginia governors don't run for re-election because they can only serve one term, then have to wait 4 years to run again.
He also likes to berate others for spelling "hypocrisy" wrong, and in the same post he wrote "hypocrit", like a moron.
He is not worthy of debate with grown-ups.
Pingback| 4.10.10 @ 6:14AM
Rebellion News links to this page. Here’s an excerpt:
Stan Redmond| 4.10.10 @ 1:01PM
I seem to remember some talking bobble head statist on TV saying something about taxes of any kind will not raise one thin dime and something about this healthcare bill being the largest tax cut in history.
I think his name was Barry Soetero.
Merlin| 4.11.10 @ 10:09AM
Listen, all liberals:
Socialism invites abuse. Average citizen is smarter or as smart as average bureaucrat and more motivated. Socialism abused requires more bureaucrats, more regulation, more and harsher penalties, none of which are economically productive.
A simpleminded analysis? Yes. Where is it wrong.
Pingback| 4.12.10 @ 12:00PM
VarLinux » Over the Counter Goes Under links to this page. Here’s an excerpt:
Pingback| 4.12.10 @ 9:05PM
Right-Wing Links (April 12, 2010) links to this page. Here’s an excerpt:
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