Paying for OTC Medications – New Rules, Big Impact

Paying for OTC Medications – New Rules, Big Impact

Dennis Callahan, Director of Nielsen Health Panel Services

Liz Yurkevicz, Analyst, Nielsen Professional Services

Summary: More than ever, U.S. consumers are being asked to manage their diseases and make significant health care decisions on their own. Recent changes in health care policy related to flexible spending accounts (FSAs) and over the counter (OTC) reimbursement could bring about real shifts in how consumers view their health and wellness options. Understanding the impact on consumer choice will be critical for retailers and manufacturers as they assess the potential risks and opportunities.

Background: History of Flexible Spending Accounts for OTC Medications

In September 2003, OTC medicines were made eligible for reimbursement in health care flexible spending accounts. These FSAs are voluntary programs many employers use to allow their employees to set aside money every year through payroll withholdings to pay for certain medical expenses not covered by insurance; this money does not get taxed.

However, the Patient Protection and Affordable Act of 2010, removed OTC medicine eligibility from FSAs, HSAs (health savings accounts), and other similar accounts unless the medicine is prescribed by a physician. These changes went into effect on January 1, 2011.

To better understand the impact of these changes on OTC purchase behavior, Nielsen surveyed the primary shopper from more than 27,000 households in December 2010.

Flexible Spending Account Enrollment Awareness and Usage

Approximately 19 million or 16 percent of U.S. households are aware of enrollment in a Flexible Spending Account through an employer.


Of the enrollees, just over half covered the costs of their OTC medications with FSA funds in the past 12 months ending in December 2010, equating to about 9.8 million households. Other uses of FSA coverage included prescription medications, dental or vision care, co-payments and office visits to a healthcare professional. Elective medical procedures were the least commonly reported as uses for the FSA dollars amongst reported households.


Alternatives to OTC Reimbursement for FSA Consumers

When faced with losing the ability to use FSA funds to cover OTC medication expenses, consumers are likely to be resilient in fulfilling their self medication needs. In fact, 21 percent indicated they would do nothing differently. However 21 percent of consumers responded that they would drastically reduce or discontinue purchasing of OTC medications.

The physician will likely play a key role under the new rules as consumers search for ways to continue using FSA funds. For example, 46 percent of consumers who used FSA to pay for OTC medications indicated they would request prescriptions for their OTC medications. Physicians will also likely be asked if a prescription product is available to replace OTC medications.

Finally, a large percentage of consumers will seek lower cost OTC options including bigger product sizes, store brands, deals and/or changing stores for better pricing as an alternative.


OTC Category Purchasing

When looking at OTC category purchasing, households that used FSA funds to pay for OTC medications in 2010 spent significantly more on cough & cold remedies and first aid categories than the general population. However, those consumers who will engage a doctor to ask for an Rx for their OTC medication and/or request an Rx replacement spent significantly more across a number of categories including cough & cold, first aid, antacids and laxatives.

If OTC Costs no loger eligible to be paid with FSA
Category Total U.S. Use FSA for OTC Request Rx for


Seek Lower Cost OTC Options Request Rx Replacement

for OTC

Cough & Cold Remedies $38.97 $45.99 $49.84 $42.71 $50.76
First Aid $15.38 $17.72 $19.48 $18.89 $20.65
Acne Remedies $14.14 $13.84 $13.39 $10.67 $12.89
Antacids $23.79 $24.55 $29.07 $19.79 $28.03
Contact Lens Solution $25.76 $25.39 $25.13 $25.91 $27.83
Laxatives $23.34 $24.44 $30.88 $21.18 $32.36
Pain Remedies $22.48 $20.39 $23.11 $21.74 $22.57
Source: The Nielsen Company

OTC Channel Preferences

Consumers who used FSA funds for OTC medications in 2010 spent significantly more OTC dollars in the drug channel than the general population. Households who will look for lower cost OTC options also spent significantly more in the drug channel, while those who would consider changing stores for better OTC prices also spend significantly more in drug and mass merchandisers. Households that may discontinue or drastically reduce OTC use spent significantly more OTC dollars in the drug and club channels.

If OTC Costs no loger eligible to be paid with FSA
Channel Total U.S. Use FSA for OTC Seek Lower Cost OTC Options Consider Changing Stores

for OTC

Discontinue or

Drastically Reduce OTC

Grocery $29.97 $28.40 $26.88 $22.93 $25.66
Drug $41.41 $59.70 $66.38 $59.49 $55.70
Mass Merchandise $44.88 $44.17 $46.82 $56.69 $47.09
Club Store $42.74 $46.68 $41.93 $28.67 $48.70
Source: The Nielsen Company

Moving Forward into 2011

The new health care law will impact many of the 10 million households who used FSA funds to pay for OTC medications in 2010. While a small number of consumers will reduce or discontinue use of OTCs, it is clear that most will be resilient and shift their healthcare utilization patterns to overcome the policy change. Doctors will likely play a key role in this shift as these consumers seek to make their medication costs FSA eligible by asking for a prescription for their OTC and/or requesting a prescription product as a replacement. In addition, retailers and manufacturers must pay particular attention to those consumers who may seek lower cost options (size, store brand, deal etc…) and/or change their store preference for lower cost OTC medications. Recognition of these shifts along with changing health care utilization patterns should drive marketing strategies (professional promotion, assortment strategies, pricing tactics) to meet these consumers’ needs.