What documentation needed for reimbursement of over-the-counter drugs?

[Guest akwallace]

A new FSA vendor we will be using for 2004 has indicated that their interpretation of the IRS rules is that over the counter drugs are eligible for reimbursement under a health FSA. They will not require a doctor's note, or any other documentation.

Can this be correct?

[Guest JerseyGirl]

Absolutely not!

Using their interpretation, both employer and employees could loose the tax favored status of the plan. IRS Cose Section 213(d)(3) states it quite clearly--*The term ''prescribed drug'' means a drug or biological which requires a prescription of a physician for its use by an individual.*

Even if prescribed by a physician, an OTC such as aspirin or Claritin is not reimbursable. The only exception to this is contact lense solution.

Sure you want to go with these guys?

[GBurns]

As JerseyGirl said .. "Absolutely not!"!!

What has this FSA vendor given you as support for their interpretation?

I just saw a prospective client who had been told the same thing down here in Florida, but it turns out that the vendor was not really selling FSA services but a scheme using medical expenses that looks like an FSA but really is the "famous" Double dipping arrangement that the IRS addressed in Rev Rul 2002-3 and 2002-80.

[david rigby]

Could you forward the names of other clients of this vendor?

[Guest tintree73]

One thing that I did notice, the 2003-2004 IRS Priority Guidance Plan (released July 24, 2003) provides at the Employee Benefits section (B.8) that it expects to release a "[r]evenue ruling under section 125 on nonprescription drugs."

Here's a link to the IRS PGP:

http://www.ustreas.gov/press/releases/js600.htm

[g8r]

I saw that in the priority guidance plan as well. I'm not sure what it is they have in mind, but the IRS can't change the Code.

[SLuskin]

The IRS did come out with a Revenue Ruling in the last few weeks about this. Drugs and medicines which are available without a prescription cannot be reimbursed through a medical FSA. What was new about the ruling was over the counter stuff which is not a drug or medicine, as long as it is for a medical use and not a personal use. The example given was nonprescription reading glasses. People buy them for $15 at a drugstore because they are farsighted and can no longer read close or little print. Because this presbyopia is a medical condition and the glasses alleviate it, the IRS has now said that we can reimburse for this. Previously, we were denying those claims because these glasses were nonprescription.

[Guest MSMA]

Well, this will be interesting. Knowing our participants, I can hear the arguments now....

"I only bought bandaids because I had a cut...and a laceration is a medical condition"

"I only bought ibuprofen because I had a headache....and migraines are a medical condition"

"I only bought Clariten® because I had hayfever...and that's a medical condition"

WHERE are we supposed to draw the line now?

I just love these rule-makers who don't have to handle the claims.

[Guest JerseyGirl]

First cardinal rule of administration of a 125 plan: when in doubt, go back and read the Plan Document. Many plan sponsors have the *no OTC rule* written into the plan language to avoid the adjudication nightmare MSMA describes.

Good plan design can and should help to avoid the pitfalls created by the *rule-makers* who don't have to deal with the results of the changes they make for us.

[g8r]

The health FSA plans I've seen don't specify "no OTC." Rather, they just refer to IRC 213(d). And, IRC 213(d) would prevent the reimbursement of any drug that is available in a form OTC. The distinction is drugs vs. other medical items.

Looking at MSMA's items, baindaids would be allowed. Ibuprofen and Claritin are drugs - therefore the OTC rule applies.

In fact, if you show me a plan that prevents reimbursement for any OTC items (non-drug items), then I'll show you a plan that has an operational violation of its terms. In fact, I could probably find a violation of the OTC drug rule as well. All I need to find is one hospital visit that was reimbursed. I'm sure you can find a charge for a bandaid or bandage (that probably cost $50) or ibuprofin or other OTC pain reliever.

[GBurns]

q8r,

I agree whole heartedly.

It always amuses me to see that claims are readily paid for exorbitantly over-priced items such as Ibuprofen and Bandaids etc when the bill is from a Hospital, but when an item comes from an employee trying to use up their own FSA money, all of a sudden there is such great scrutiny and fear of improper reimbursement.

[Guest JerseyGirl]

When using the term *OTC* I was referring to drugs only, not durable medical goods, since that specifically is what akwallace was inquiring about in his original post. He also stated that this particular vendor “would not require a doctor’s note or any other documentation.” A recipe for disaster, in my opinion.

As far as approving the claim for the $50 aspirin from a hospital, I believe that in those circumstances the patient is being administered the medication on the instructions of the doctor by the hospital staff, and therefore is not technically purchasing it ‘over the counter’—but, that doesn’t make the cost any less obscene!

The ‘great scrutiny and fear of improper reimbursement’ arises from the obligation of a TPA to keep the plan (and everyone in it) in compliance, and not any desire to keep the participant and his hard-earned money separated. I’m a participant myself, but that doesn’t prevent me from denying reimbursement of claims for massage therapy, sun block, Epsom salts or private sessions with a Pilates instructor. Some days, claims adjudication can be a whole lot of fun!

I suspect that the impending Priority Guidance Plan will have more of an impact on Publication 502 than on IRC 213(d). The list of eligible expenses stated there is the most broad and liberal allowable (but even there non-prescription drugs and medications are listed as ineligible), and it would appear that a few more *goodies* will soon be added. Who knows, maybe they’ll add those Pilates classes!

[GBurns]

Re: "The ‘great scrutiny and fear of improper reimbursement’ arises from the obligation of a TPA to keep the plan (and everyone in it) in compliance, and not any desire to keep the participant and his hard-earned money separated."

That is exactly the point that both q8r and I are making. It does not "keep the plan (and everyone in it) in compliance" or correct an "operational violation" if you pay the hospital but will not pay for the same thing if it is from the participant.

By the way, *OTC* is not a method of purchasing, it is a classification.

[Guest JerseyGirl]

GBurns,

I guess what you’re saying is that in order to be in strict compliance with current IRS regulations, there is no situation in which an over-the-counter medication can be considered an eligible medical expense. You and q8r obviously feel that's wrong and I suggest you contact your Congressmen about getting things changed.

But at the present time, there is at least a loop-hole. The most common form of documentation provided by a participant for a hospitalization is the insurance carriers EOB, showing total charges, insurance payments and the portion which is the participant’s obligation. But an EOB usually does not have any itemization of fees. So, if that dollar amount that the patient owes should happen to include a hidden fee for a $50 aspirin, at least the participant had the opportunity to use pre-tax money to pay for it.

By the way, the administrator of a Section 125 plan does not ‘pay the hospital’ for anything.

[GBurns]

JerseyGirl,

I suggest that you reread ALL the posts, neither q8r or I advocated anything that you have suggested that we did. And a Congressman would not be relevant to anything said in any of the posts.

Further, no one said anything that should suggest that the administrator of a Section 125 plan " ‘pay the hospital’ for anything". The context of the statements made by q8r and me related to the payment of claims in general.

[g8r]

JerseyGirl,

I think several laws have been proposed to change the rule for OTC drugs. Personally, I'm not advocating one position or another. I'm just looking at the statute which provides that OTC drugs aren't reimbursable. I agree that as a TPA you need to administer the FSA in accordance with the law. But, I wouldn't be so quick to call it a loophole.

I realize that most TPAs will just use the EOB from a hostipal bill and will reimburse expenses that aren't covered. However, I have a question for you or anyone else handling claims from hospitals - I'm asking b/c I don't know how it's handled in practice. When a hospital bill is submitted to an insurance company, does the insurance exclude the OTC drugs? I know that a hospital bill is rarely paid at 100%. The EOB will indicate what portion when to a deductible, etc. But, do you really know from the EOB whether OTC drugs were paid or whether they were somehow buried in the other non-covered expenses? Again, I don't know the answer to this. But, I'd be interested in comments on this. If the insurance company does reimburse you for all or a portion of OTC expenses, then arguably those amounts should be included in income (and I know that's not happening). So, perhaps there is some other provision in the Code that allows these to be excluded that I'm not aware of.

If there is no other provision in the Code (and I'm fairly confident there isn't), then if an OTC is buried in the expenses but isn't paid by the insurance company, I wouldn't consider reimbursement based on the EOB as a loophole. Rather, I'd say that relying on the EOB would be improper. I know that from a practical standpoint, neither you nor any other TPA is going to change the way EOBs are relied upon. However, there's nothing in the 125 regs indicating that you can rely on an EOB. I think amounts that are applied to a deductible are safe - b/c to be applied to the deductible they must both be a proper medical expense and be covered by the policy. Anything other non-covered expenses could be questionable. To me it depends on how detailed the EOB is on non-covered amounts.

For example, suppose I go to the Dr. for massive therapy and as part of that it's suggested that I get something questionable, such as a pool. If I submit that expense to the insurance company I'll get an EOB showing $0 paid. Can you tell from the EOB whether it wasn't covered because it is not a medical expense or that it wasn't covered b/c even though it might be a medical expense, the policy just doesn't cover it? If you can tell from the EOB, then I'd suggest you have a fairly reliable EOB and even if the insurance company happens to treat OTC drugs as medical expenses, it's wrong but even I would rely on the EOB. But, if the EOB doesn't make a distinction, I'd advise every participant to submit every expense to the insurance company - bandaids to aspirin - just to get an EOB showing it wasn't reimbursed by the insurance company. Then I'd submit the EOB to the health FSA and get reimbursed b/c the TPA relies on the EOB. Of course that sounds absurd, but I only raise this point out that reliance on an EOB might not necessarily be safe. I'm not a TPA and I haven't been in the hospital so I don't know how detailed the EOB is.

[Mary C]

This may be off the subject, but few years ago I took my 10-month old to the ER when he fell out of a grocery cart and hit his head, they gave him less than a tablespoon of children's tylenol. Since we were certifying all claims in HR before submitting them to the insurance company at the time, I saw my bill and that they were charging $54 for the tylenol. The insurance company paid the whole thing. A week later, I got a survey from the hospital. I replied that it was criminal to charge $54 for 1 tablespoon of tylenol. A week after that I got a call from the patient representative to explain what had happened (they did not have a billing charge for an individual dose of children's tylenol and I was charged for the whole bottle) and later a check for $54.

So yes, hospitals do itemize drugs and yes, insurance companies do pay for OTC drugs.

[Jbentz]

OTC drugs are considered part of all hospital bills - it is part of the treatment while you are there. I have been in this business for 14 years and I have never seen them denied. Most hospitals will not let you bring in your own OTCs or prescriptions, they need to regulate all medications while you are there, based on your reasons for being there, other medications, etc...

The EOB question will depend on the codes used by each insurance company and will vary greatly.

Some plans do not pay for "take home drugs" as part of the hospital charges. These will denied, even prescription drugs. The ususal reasoning is that these are prescription drugs and scripts could have been given. That way the plan will process them as prescriptions, with co-pays, discounts, etc. I got burned on that once in the ER and have asked for WRITTEN prescriptions since. They were covered by my Section 125 plan.

Hope this helps.

[KJohnson]

What do you know, they changed their minds....

http://www.treas.gov/press/releases/js695.htm

[GBurns]

I do not think that they changed their mind as much as they are having problems with using Proposed Regulations as law. Now that they have to look into it they are seeing the conflicts with the IRC and other "real" Regulations First COBRA then HIPAA then 105 now 213.

[Kathy]

I just want to point out how funny it is to go back and reread the first posts in this thread knowing what we know now! I still have the same types of questions about where we draw the line and the documentation to require but at least we have some relief from the inability to reimburse valid medical expenses that were preveiously just not allowed!