Correcting Contradictions: Restoring OTC Coverage to Health Spending Accounts in the US

Ballooning health care expenditure is an increasingly large burden for economies around the world. The problem is especially worrisome in the US, in part due to the high price of health goods and medical services. As a result, the US governing agencies are enacting policies that attempt to reign in health care spend and reduce costs. This objective is a cornerstone of the Affordable Care Act (AFA), as the name implies, which was signed into law in March 2010. However, under the AFA, the vast majority of over-the-counter remedies (OTCs) are no longer eligible for purchase with tax exempt health spending accounts. This effectively raises the price of these products, which is a direct contradiction of one of the primary goals of the AFA.  Restoring OTC coverage is a key legislative goal for several organizations and political representatives, and while it will correct an inconsistent approach to the health care policy, its overall impact on the US OTC market will likely be limited.

A Growing Hardship

Burgeoning health care expenditure is a growing issue worldwide. Consumers spent US$3.9 trillion globally on health goods and medical services in 2013, which is up 3% year-on-year and more than double from just 20 years ago (using constant terms to discount inflation). The US is particularly afflicted by this hardship, accounting for 60% of the global health care expenditure or US$2.4 trillion. According to the World Bank, health expenditure derives 17.9% of the US gross domestic product, which is most of all countries tracked. On a per capita basis, consumers in the US spent on average US$7,491 on health goods and medical services in 2013, or thirteen times more than the global average. This number, already up nearly US$700 from 2008, is only expected to grow with the aging population and the increased prevalence of non-communicable chronic diseases.

Highest Per Capita Expenditure on Health Goods and Medical Services by Country 2013

Source: Euromonitor International

Correcting a Contradiction

The principal goals of the AFA are to increase insurance coverage, improve medical care and reduce costs. However, the aptly named “medicine cabinet tax” eliminates consumer’s ability to pay for most OTCs from pre-tax health spending accounts, including flexible spending accounts (FSAs) and other health savings accounts (HSAs), unless a doctor’s prescription is provided. Though acting as an additional source of tax revenue, the medicine cabinet tax is inconsistent with the goal of reducing healthcare costs. OTC remedies are among the least expensive forms of medical care and promoting self-medication using these products would be in-line with the Obama association’s objectives. However, the medicine cabinet tax does the opposite by raising the prices of these goods through sales tax or a prescription requirement, which necessitates additional expenditure on doctor’s visits.

Consequently, the medicine cabinet tax has drawn negative attention as a poor health care policy. The Consumer Healthcare Products Association (CHPA) has stated that restoring OTC eligibility to FSAs and HSAs is a top legislative priority. Other advocates include the National Association of Chain Drug Stores (NACDS) and the National Community Pharmacists Association (NCPA). Progress towards repealing the medicine cabinet tax has already been made. A bill was introduced in the US House of Representatives on 25 July 2013 by Lynn Jenkins, a republican from Kansas, and John Barrow, a democratic from Georgia, called Restoring Access to Medication Act of 2013. In November 2013, similar legislation was introduced in the US Senate by republican Senator Pat Roberts (Kansas) and democratic Senator Mary Landrieu (Louisiana). In a statement, Senator Roberts said that “Rather than promoting cost-effectiveness and accessibility, [the medicine cabinet tax] directs people to potentially more costly, less convenient, and more time-consuming alternatives.”

With the federal budget stalemate passed and President Obama’s willingness to support reasonable improvements to the AFA, as well as strong lobbying for and progress made in bi-partisan and bicameral support, reinstating OTC coverage to FSAs and HSAs in the near future is a real possibility.

The Potential Impact

The US is the world’s largest OTC market with retail value sales reaching US$24.4 billion in 2013, or just under one-quarter of global sales. Therefore, legislation that may have a notable impact on OTC purchases can have serious market implications. However, given the participation in the health spending accounts and the nature of OTC remedies, restoring eligibility will have a minimal impact on market performance.

In Senator Roberts’ statement, he noted that approximately 50 million Americans participate in FSAs and other health savings accounts. Though a significant number, it only represents about 20% of the US population 20 years or older. Therefore, the medicine cabinet tax currently only affects about one in five adult consumers in the US. Also, the health spending accounts can be used on a variety of health services, including medical, dental and vision care. Given the more expensive nature of these services, many consumers would likely prioritize using their pre-tax dollars on items other than OTC. Additionally, it has also been shown that the one in five adult consumers who hold one of these accounts tends to be more affluent than average. This, in combination with the inelastic nature of OTC products, means that the overall price of these products is not likely to be the determining factor for purchase. Health spending account participants will be unlikely to decide not to purchase a pain reliever, for example, if they cannot use their account for payment.

Although restoring OTC coverage would correct a contradiction in the US health policy, it will not likely have a large quantifiable impact on the market. Ultimately, other factors like consumer trends and demographics will be much more influential on market performance.

US OTC Historical and Forecast Retail Value Sales and Growth 2008-2018

Source: Euromonitor International