Health Care Debit Rx

  Health care-benefits programs in the United States that enable consumers to use debit cards to access flexible spending and health reimbursement accounts got a boost this year from a new requirement that affects the way retailers handle payments for health care purchases. Consumers with health savings accounts tied to debit cards indirectly will benefit from the change.
  The development is the result of a cross-industry effort to remove a barrier to debit card growth in the high-stakes health care industry.
  On Jan. 1, the Internal Revenue Service began requiring all general retailers to automatically identify eligible purchases made with debit cards tied to the pretax accounts. Pharmacies must meet the same requirement to establish an inventory information-approval system next Jan. 1, and many already are complying.
  These changes are designed to make pretax health care accounts more user-friendly for consumers and more cost-effective for health plan administrators. “Moreover, the new processes could spur growth in debit cards linked to health care accounts,” says Red Gillen, a senior analyst with Celent, a Boston-based financial-services research company.
  Under the new system, merchants must identify items eligible for purchase from tax-free health care accounts and place the purchase information in a special field when seeking a transaction authorization from the card issuer at the point of sale. Thousands of prescription and over-the-counter medicines and therapeutic products sold through general retailers and pharmacies are eligible for the pretax payments.
  Real-time verification at the point of sale simplifies third-party administrators’ task of substantiating claims for purchases made with health care debit cards, particularly when ineligible products are combined with eligible items in one transaction. It is common for consumers to mix miscellaneous, ineligible items into their shopping baskets with eligible items, Gillen says.
  Many consumers with flexible spending account debit cards will be relieved of the need to submit paperwork separately to their employers for verification when they buy eligible medical products at retailers and pharmacies that comply with the new IRS rule. Situations where employers restrict purchases of certain products with health reimbursement account debit cards–such as brand-name drugs–will be unaffected by the new IRS rule, Gillen notes.
  A spokesperson for the Washington, D.C.-based National Association of Chain Drug Stores says the organization’s members reported “a fair amount of software coding” was required to comply with the rule, but she could not quantify the cost. Analysts say retailers willingly complied with the rule because health care is an important category, and the vast majority of over-the-counter drugs are sold through general retailers.
  The rule change is a welcome relief for third-party administrators. “Debit card programs for FSA and HRA accounts were more trouble than they were worth to some third-party administrators because of the cost of back-office processes to manually sort out which payments are eligible and which are not,” says Jody Dietel, chief executive officer and chief operating officer of Vista, Calif.-based Creative Benefits Inc., a third-party benefits administration company that serves many large employers.
  Problem Resolved
  That problem ceases to exist for purchases made at retailers complying with the new IRS rule because ineligible purchases using an FSA or HRA debit card are denied, and consumers are asked to provide an alternative form of payment for those items, such as another card or cash.
  Blocking ineligible payments “may take a minute or two more at checkout, but the freedom from submitting paperwork later is seen as an overall convenience to the customer,” says Gillen.
  Indeed, the new IRS rule removes some of the biggest obstacles in the path of health accounts, and it could be the start of broader connectivity between all health care industry players, says Carlton Doty, a senior analyst with Cambridge, Mass.-based Forrester Research. “What’s needed to make health care more affordable is more cross-industry collaborations like this that connect the dots and increase efficiency between participants,” he says.
  Debit card programs tied to health care accounts should benefit immediately from the new IRS rule, analysts say. Health savings accounts, whose growth has not met initial expectations, also will become more user-friendly, although some payment companies have lost enthusiasm for the HSA market (see sidebar on page 30).
  FSAs, established by the government in 1978, are the dominant type of health care account in the U.S. Primarily offered by large companies, they enable workers to set aside a portion of wages pretax for medical, dependent and transit expenses. FSA funds unused at the end of the year revert to the employer.
  Health reimbursement accounts, established by the government in 2000, are accounts employers set up to reimburse employees or retirees for health care expenses, deductibles and co-pays. Employees may not contribute to HRAs.
  The IRS authorized the launch of debit cards for use with FSAs and HRAs in 2002, and debit cards are now attached to approximately 25% to 30% of FSAs and about 10% of HRAs, according to Celent.
  HSAs entered the marketplace in 2004 after Congress authorized their creation in late 2003 through the Medicare Modernization Act. President Bush at the time touted HSAs as a means to cope with skyrocketing health care costs by enabling consumers or employers to set aside funds for qualified medical expenses in an individual, tax-exempt trust account. HSAs require participants to have a high-deductible health-insurance plan and not be eligible for any other health care coverage.
  HSA participants may move unused funds from the previous year to other interest-bearing accounts. Financial institutions offer debit cards, usually branded by MasterCard, Visa or Discover, to access approximately 95% of HSAs, says Celent.
  All expenses paid through FSAs and HRAs require substantiation to verify they are eligible. Consumers with FSAs and HRAs submit claims to third-party administrators, usually by mail, fax or online. Many FSA and HRA debit cards are set up so that purchases made at a retail store or pharmacies complying with the new IRS rule automatically are substantiated, and the cardholder is freed from the responsibility of submitting a separate claim.
  The new IRS-inventory requirement also is expected to simplify operations for HSA customers with debit cards. Although HSA purchases do not require third-party substantiation, participants must submit receipts for eligible purchases to the IRS with their tax records. Those are flagged on receipts at retailers and pharmacies complying with the rule.
  Growth Potential
  Fewer than 2 million consumers have established HSAs in the U.S. By comparison, they have enrolled in about 19 million FSAs and 7.5 million HRAs.
  HSAs are on the rise, however, and Celent expects FSA and HRA growth to peak and then begin to wane by 2010.
  â€œHSA growth is taking a bite out of FSA and HRA account growth, but FSAs will remain a big factor in the marketplace,” says Greg Licata, chairman of the board of the Special Interest Group for Inventory Information Approval Standards, a company various payments-industry players formed last year to help facilitate the new IRS rule.
  The cross-industry group played a key role in spurring the rules change. Retailers, merchant acquirers, payment card networks, issuer processors and third-party administrators agreed on the standards,then gained the “blessing” of the IRS, says Licata.
  Members of the industry group include Visa, MasterCard, Discover, Chase Paymentech Solutions Inc., First Data Corp., Metavante Corp., Total System Services Inc., Target Corp., Wal-Mart Stores Inc., Humana Inc. and several other payment-industry players.
  â€œWe started as a group of volunteers, then formalized our efforts in December 2007 and formed a company to maintain oversight of inventory-information standards,” says Licata, a former Metavante employee who was selected to chair the new company. “As far as I know, this is the first time rivals in the card-processing industry got together to work together on finding a solution like this.”
  The industry group has established strict standards to avoid any antitrust violations and never discusses pricing or competition, he says.
  Card processors say the IRS rule will spur more employers and third-party administrators to encourage debit card use by consumers with FSAs and HRAs.
  â€œWhen third-party administrators don’t have to tie up resources chasing down ineligible payments and consumers don’t have to jump through so many hoops, employers will be more energized about promoting debit cards for FSAs and HSAs because it’s a super-efficient way to manage expenses,” says John Reynolds, vice president of Milwaukee-based Metavante’s health group division. Metavante is a leading processor of health care debit cards.
  Licata says the number of debit cards attached to FSA and HRA accounts is growing by 20% annually, and he expects that trend to gain momentum with the new rule.
  According to Robyn Bartlett, general manager of health care payments at Greenwood Village, Colo.-based First Data, which processes cards tied to HSAs and FSAs, the new IRS rule for categorizing eligible medical expenses at the point of sale will provide an immediate benefit for both programs.
  â€œOur guess is that it will become the norm, rather than the exception, for plan administrators to issue debit cards for FSA accounts, and this will drive card usage and volume for tax-advantaged accounts,” Bartlett says. She would not say how much increased debit card activity First Data expects from the new IRS rule.
  First Data estimates that the “pay and chase” process of sorting out ineligible claims on FSA and HSA debit cards costs third-party plan administrators between $5 and $25 per claim. “Cutting out the extra bureaucracy will finally make debit cards cost-effective for plan administrators,” Bartlett says.
  Fewer Transactions Cancelled
  Health care industry players also expect the inventory-information approval system to reduce the rate of declined transactions consumers traditionally have experienced when making purchases from FSAs or HRAs using debit cards, says Beth Bierbower, vice president of product innovation for Louisville-based health insurer Humana Inc., which also is a member of the cross-industry group.
  â€œPrior to the new IRS inventory rule, decline rates at retail using FSA or HRA debit cards were about 12% because of the complexity of verifying whether or not the prescription or product being purchased qualifies,” Bierbower says. She expects the new inventory standards the retailers adopted to reduce declined transactions to a percentage in the low single digits.
  An estimated 60 national retail chains went live with auto-substantiation of eligible health care-account purchases on or before Jan. 1, including Wal-Mart, Target, Longs Drugs and CVS Caremark Corp. These include many national pharmacy chains, most of which already are complying with the new IRS inventory-categorization rule.
  The transition has been relatively smooth, say participants. “Big chains are not having trouble with compliance, but we do have some concerns about the pharmacy sector and whether mom-and-pop drug stores have the underlying inventory-management systems to comply with the new IRS rule next year,” says Duane White, group executive for health care at Columbus, Ga.-based TSYS, which processes thousands of prepaid debit cards for tax-advantaged health accounts.
  Drugstore.com, a Bellevue, Wash.-based online retailer of health care products, was years ahead of the game. It created an online “FSA store” in 2005 that grouped together plan-eligible products in an online storefront for FSA participants. Last June, in response to demand, the company added an HSA storefront.
  â€œWe provide tools to help plan participants keep track of their health-account spending and recommend bundles of products that qualify for payment eligibility with health care debit cards,” says Karen Swaim, FSA and HSA marketing manager for Drugstore.com. “
  Top-selling plan-qualified products include medications to reduce stomach acid, fertility test kits, pain relievers, bandages and eye care products, Swaim says.
  Any discussion of the future of HSAs begs the question of whether President Bush’s plan to cut health care costs will become a success. Still unknown is how the U.S. president elected this year will view tax-advantaged health care accounts if he or she introduces a new scheme for health care payments.
  Licata doubts the new president will quell growth in card-based health care initiatives. “Regardless of who is elected president, it is most likely that whatever is implemented going forward will be based on existing standards, and what we have achieved with health care payments at the retail level will not go for naught,” he says.
  It is too soon to know the full impact of the new IRS rule. But this year will be important in determining how improved technologies and policies may drive more volume for debit cards associated with tax-free health care accounts.
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