January 2012

Although the U.S. Senate voted along partisan lines to defeat repeal of the Patient Protection and Affordable Care Act — also known as Obamacare — it overwhelmingly voted to repeal one of the provisions that has prove most burdensome to entrepreneurs: the mandate for business to file IRS 1099 reports on any purchase over $600.

The House should follow suit, and President Obama should be true to his new-found dislike of the provision expressed in the State of the Union and sign the repeal into law. Then, while the law’s constitutionality is before the courts, Congress should continue pruning the branches that have proved to be the most burdensome to doctors, entrepreneurs, consumers, and savers and investors.

The next “branch” that should be up for pruning is the stealth “medicine cabinet tax” that prohibits consumers for purchasing over-the-counter drugs — including pain relievers, prenatal vitamins, and Pedialyte for kids — with their flexible spending accounts and and health savings accounts unless they go through the the cumbersome process of getting a doctor’s prescription. The Los Angeles Times reports that Sen. Kay Bailey Hutchison (R-Texas) and Rep. Erik Paulsen (R-Minn.) plan to introduce  measures that would get rid of this provision next week.

Both provisions impose incredible paperwork burdens that should have been considered before the law was rammed through last year.

Sen. Mike Johanns (R-Neb.), who supported the 1099 repeal before it was “cool,” has shared powerful examples of how the rule is harming small entrepreneurs in Nebraska and across the country. A small fire truck manufacturing company told him the rule will cost the firm an extra $23,000 in accounting fees. A restaurant owner says the rule “forces me not to hire local vendors” and instead go through a “single regional contractor.”

The “medicine cabinet tax” on HSAs and FSAs has created a similar paperwork burden as well as outright confusion about how to comply with the law. Requiring a prescription defeats the purpose of over-the-counter drugs. The number of prescriptions that consumers have to request and doctors have to write and renew could likely go up more than ten-fold. That is, if consumers simply don’t decide to get the prescription drugs that may now be cheaper for them to buy, but more expensive to the health care system. As an editorial in the San Jose Business Journal puts it, “No one is going to pay for the doctor’s visit, spend time in the doctor’s office, or schedule time off work to accomplish this.”

Retailers also face a big burden. Payment systems were already programmed with a list of eligible OTC drugs for medical account debit cards to prevent cheating with these accounts, alleviating one of the concerns this provision supposedly addresses. But now, cashiers may have to play the role of pharmacists in verifying a prescription, a process that will likely add substantial costs in time and money, resulting in price increases across-the-board for retail items

Obamacare’s edifice is crumbling in the court’s and in Congress. Although the 1099 rule and medicine cabinet tax can both be ended before full repeal of the health care law, it should be remembered that they were enacted because of the flawed process of ramming this bill through Congress.

Both are gimmicky revenue “offsets” done so the Congressional Budget Office would technically score Obamacare as reducing the deficit, and score repeal of the law or even of these individual provisions as increasing it. Washington Post blogger Ezra Klein, a chief cheerleader of the law, scolds that by going after the 1099 rule and flex limits, “GOP looks to make Affordable Care Act less fiscally responsible.” (Though in the same column, Klein said he would “reform” the 1099 rule, but wasn’t specific on how to do this.)

However, experts looking at these provisions have said they will have a negligible effect on the deficit, and, particularly in the case of the OTC drug rules, may even increase it. IRS National Taxpayer Advocate Nina Olson has stated that the rule’s “new reporting burden … may turn out to be disproportionate compared with any resulting improvement in tax compliance.” The IRS already has ways to track vendors’ income without this rule, and Olson added that  rule could “be a burdensome task … for the IRS itself,” requiring substantially more spending to enforce it.

As for the OTC drug rules, if they shift folks with HSAs and FSAs toward  more expensive prescription drugs, government and private sector costs could explode by the billions. As I have noted previously, a 2005  study in the American Journal of Managed Care found that the Food and Drug Administration’s clearing of antihistamines such as loratadine (Claritin) for over-the-counter sale saves about $4 billion a year in health care costs. These savings could be wiped out if patients are discourage from buying OTC drugs, and there would also be the added costs of the doctor’s visits to get the prescriptions. Many of these costs would be absorbed by the government, which under the law is subsidizing health care plans for individuals with income up to 400 percent greater than the poverty level. This would, of course, greatly add to the deficit.

So for fiscal reasons and to remove burdens from consumers and entrepreneurs, Congress should repeal these rules, waiving the technical pay-as-you-go rules if necessary. In the meantime, as I suggested yesterday, the Obama administration should suspend enforcement of these and other burdensome rules until there is a ruling on constitutionality of the law in its entirety from the Supreme Court.