"Medicine Cabinet" Tax a Bitter Pill for Ordinary Americans


Posted by Blake Seitz on Friday, August 3rd, 2012, 11:34 AM PERMALINK


This content is provided by the Americans for Tax Reform Foundation.

Tax Provision

Section 9003 of the Patient Protection and Affordable Care Act changed the definition of “medical expenses” for Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), health flexible spending arrangements, and health reimbursement arrangements to match that of the medical expenses deduction. Under the new definition, holders of account-based health plans will not be able to use pre-tax dollars to purchase over the counter (OTC) medications, unless they bear a prescription from a doctor. They will pay out of pocket for these products, and will not be able to deduct them come tax time. This provision went into effect in 2011.

ATRF Analysis

Account-based health plans are increasingly popular among consumers looking for more control over their health dollars. Such plans have experienced substantial growth since their inception in 2003. The Employee Benefit Research Institute found that enrollment in consumer-driven (account-based) health plans stood at 21 million in December of 2011 — 12% of the health care market.

And available data show that these enrollees are overwhelmingly middle-class. A 2009 study by America’s Health Insurance Plans, a trade group, utilized geo-coding techniques to develop a proxy of enrollee income level. The study found that 95% of HSA enrollees live in neighborhoods with median incomes below $100,000. This suggests that adverse rules changes to account-based health plans will hurt the middle class.

And hurt them they will. Millions of middle class enrollees will face a higher tax liability resulting from deductions disallowed, and will also pay significantly more to purchase everyday OTC medicine like aspirin, cough medicine, and decongestants. Competitive Enterprise Institute economist John Berlau stated in a blog post that the tax increase on these medicines “is an effective 40%.”

Commentators have taken to referring to the rules change for account-based health plans as the “medicine cabinet tax.” Iain Murray put it more bluntly: the rules change is “a tax on your colds and flus.” Whatever it is, it will increase the tax bill and health bill of ordinary Americans, and should be opposed.

10 Year Cost to Taxpayers

Joint Committee on Taxation: $5 billion

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