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Health Works Collective > Policy & Law > Health Reform > Restrict Flexible Spending Accounts
BusinessHealth ReformPolicy & Law

Restrict Flexible Spending Accounts

DavidEWilliams
Last updated: 2017/08/25 at 1:40 PM
DavidEWilliams
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The Patient Protection and Affordable Care Act (PPACA) has a number of annoying little aspects to it. Some, especially the rule requiring businesses to prepare 1099s for any vendor they spent more than $600 with, are just ways to offset the cost of the overall package and don’t add anything to the objective of health care reform. I was glad to see that one overturned. As part of the Republican-led assault on PPACA, legislators are looking for other provisions to eliminate or undermine. The latest one to come to the fore is a rule that requires patients to obtain a doctor’s prescription for over the counter drugs if they want to claim reimbursement under their Flexible Spending Account (FSA). (As a reminder, an FSA allows employees to contribute pre-tax dollars to an account they must use in that year for eligible health care expenses.) The reason the rule was included was to reduce the tax deductions associated with FSAs. If people use FSAs less, the tax deductions drop. The approximately $5 billion impact over the next 10 years is to be used to fund other aspects of the bill, such as subsidies to make health insurance more affordable. There are all sorts of annoying consequences of this rule, as reported on the front page of today’s Wall Street Journal (In Health Law, Rx for Trouble). The rule’s detractors argue, and the Journal tacitly agrees, that this is a bad rule and should be overturned. I disagree. The key negative points of the rule are as follows:

  • Doctors, especially pediatricians, are being bombarded with request lists from patients or parents to write prescriptions for OTCs
  • Pharmacy fulfillment costs are rising as pharmacists apply personalized labels to the drugs for certain patients who want to use special debit cards
  • Costs may rise as patients ask for traditional Rxs rather than OTCs
  • Almost no one noticed the provision until it went into effect; as a result the consequences were unforeseen

The individual points are debatable. For example, I discussed the potential consequences of the rule on the blog back in July (Podcast interview: Impact of health reform on Flexible Spending Accounts) But in the big picture it’s good to see FSAs being scaled back. Rather than revert to the pre-PPACA rules, I’d rather see FSAs phased out entirely. The problems with FSAs are fairly significant:

  • They encourage overspending on health care by providing a tax incentive to spend more
  • The use-it-or-lose-it provisions of the FSA are wasteful, causing people to spend down their accounts on things they don’t need
  • FSAs are only available to people whose employers provide them, and not every employer can do it
  • FSAs are only valuable to higher income earners, who pay substantial taxes. Richer people in higher tax brackets get the most savings, so it is regressive
  • FSA administration itself adds expense to the system

After getting rid of FSAs, we should phase out the tax deductibility of health insurance in general. We have a huge health care overspending problem in this country and frankly don’t need to be using the tax code to encourage even more spending. Let’s use the flare-up over the new FSA rules as an opportunity for a discussion about how to tackle the broader problems in health care, not as a whipping boy to decry the unintended consequences of government action.

TAGGED: FSA, health care business, health care reform

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DavidEWilliams March 9, 2011
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