Saturday, December 26, 2009

Yet Another Poison Pill Provision in Democrats' Health Care Plans

Many people, myself included, have health savings accounts or flexible spending accounts so that they can spend for health care as a pre-tax expense. That has the effect of reducing health care costs for the individual, and is an effective tax cut for those who opt for these accounts.

Both the House and Senate versions of the bill all but eliminate the over the counter (OTC) spending allowances.

This is an effective increase in the cost of health care and a tax hike since the year end income statement will be higher than if OTC were allowed.
But Section 9004 of the pending 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.
I've managed to take advantage of this program for the past couple of years and have saved quite a bit of money; yet a cost-savings measure like this is being eliminated by the Democrats? Curious. Very curious.

What could possibly be the rationale for so severely restricting HSA and FSA expenditures so as to render them useless for many who would otherwise take advantage of the tax savings by putting money into these accounts (which are use them or lose them annual allowances).

The federal government itself believes that FSAs and HSAs can provide pre-tax savings of at least 26%. That's 26% that the individual is not paying at the end of the day for health care costs.

If those costs are disallowed, that means that the individual will be paying that much more, and the costs will increase to the individual and society in general. In fact, it means that the health care costs will increase.

Take someone who happens to require daily aspirin for a heart condition. Over time the cost for that medication can add up, but a FSA can reduce the cost to someone, particularly if they're on a fixed income. Or, take someone who suffers from allergies. They'd get hit with a higher bill at the end of the year because they couldn't include Claritin or any of the other allergy medications in their FSA costs.

If anything, the curtailment of OTCs in FSAs would result in fewer people using FSAs.

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