Beginning January 1, 2011, OTC drugs and medications will require a prescription to qualify for tax-free reimbursement from an FSA, HRA, or HSA. The IRS recently issued guidance regarding the use of debit cards to purchase OTC items following this change. Notice 2010-59 provides, among other things, that debit cards may not be used to purchase OTC drugs and medicines after year-end, even if the drug or medicine is processed as a prescription.

We believe that the IRS did not fully understand the capabilities of the SIGIS standard and retail technology when issuing this guidance. SIGIS has written a comment letter to IRS/Treasury and asked for a meeting to discuss this issue. We seek to have the IRS issue supplemental guidance clarifying that health benefit cards may be used. In the wake of the passage of the health care reform bill, however, the IRS staff has numerous demands on its time and attention and may not be able to address our request formally before the end of the year.

Notice 2010-59 has important implications that we want you to be aware of:

• Under the current guidance, OTC drugs and medicines processed as prescriptions may not be purchased using a health benefit debit card
• The SIGIS standard and merchant POS technology are currently incapable of excluding OTCs processed as Rx from the health care eligible and optional prescription drug amounts, and any change would take a long time to implement throughout the industry
• This means that health benefit debit card purchases of OTC drugs processed as prescriptions could be approved at time of sale; such transactions would be technically non-compliant with the provision of the Notice that prohibits card use for such transactions.

In its comment letter to the IRS, SIGIS has pointed out that our standard in fact does enable compliance with the IRS prescription requirements for OTC drugs and medicines, and we are hopeful that they will remove the blanket prohibition on health benefit debit card use for such items. We will continue to approach the IRS and Treasury on this issue and will update you as we know more.

The letter to the IRS is attached below for your reference.

If you have any questions, you may contact the SIGIS Help Desk at help@sig-is.org

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ALSTON & BIRD LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, GA 30309-3424

404-881-7000
Fax:404-881-7777
www.alston.com
Direct Dial: 404-881-7885
E-mail: john.hickman@alston.com

September 30, 2010

CC:PA:LPD:PR (Notice 2010-59)
Courier's Desk
Internal Revenue Service
1111 Constitution Avenue, NW.
Washington, DC 20044

Delivered via Courier and Electronically via notice.comments@irscounsel.treas.gov

Re: Notice 2010-59

Ladies and Gentlemen:

We are writing to comment on Notice 2010-59 on behalf of the Special Interest Group for IIAS Standards ("SIGIS"). SIGIS has nearly 12,000 members approximately 7,500 members of which are IIAS merchants and 3,900 "90% rule" merchants. SIGIS members and their customers will be affected by the guidance contained in Notice 2010- 59 relating to the change for over-the-counter (OTC) drugs and medicines brought about by the Patient Protection and Affordable Care Act (ACA) (referred to herein as the "New OTC Rule").¹

SIGIS appreciates the efforts that IRS and Treasury have made to provide guidance in advance of the January 1, 2011 effective date of the New OTC Rule. The transition period that continues to allow the use of debit cards for purchases of OTC medicines and drugs with an IIAS through January 15, 2011 and the guidance with respect to calculation of the 90% test will be particularly helpful in implementing the New OTC Rule.

At the outset, SIGIS recognizes that the current system of substantiating OTC medicines and drugs which operates without verification of a prescription will not be permitted after the close of the January 15, 2011 transition period. SIGIS has already reviewed its current list of OTC items and identified medicines and drugs that would no longer qualify for substantiation without a prescription. In December, SIGIS will publish its detailed list so that merchants can update their inventory systems.

It does need to be noted however, that SIGIS currently has an alternate IIAS approval process in place, that allows prescribed drugs (including OTCs) to be auto-substantiated only after a prescription is verified. SIGIS is concerned that the language in Notice 2010-59 relating to the use of debit cards is overly broad and could be read to prohibit the use of debit cards for purchases of OTC drugs even though the drugs are prescribed in accordance with Notice 2010-59 and adequate independent substantiation is provided in accordance with that Notice and other existing guidance. In particular, for the following reasons, we request that Notice 2010-59 be clarified to provide that the use of debit cards for purchases of OTC drugs and medicines is permitted when a prescription for the OTC medicine or drug is verified at the point of sale by the pharmacist or a pharmacist technician:

• Existing IRS guidance recognizes that debit card purchases can be effectively and reliably substantiated at the point of sale provided any IRS substantiation requirements are satisfied;
• Current systems accurately provide electronic substantiation of the existence of a prescription for all prescribed medicines and drugs, whether OTC or prescription only, through the use of methods consistent with the requirements of Notice 2006- 69;
• In verifying an Rx, current IIAS systems cannot distinguish between OTC medicines dispensed with an Rx and all other medicines and drugs for which a prescription is legally required. Thus, as broadly written, Notice 2010-59 negatively impacts IIAS systems ability to auto-substantiate debit card transactions for all prescriptions (and potentially any otherwise permissible IIAS transaction);
• Without a clarification to Notice 2010-59, the SIGIS IIAS standard specification would require sizeable changes and merchants’ pharmacy operations systems and point of sale systems would require significant changes and investment that could not be fully deployed for at least 18-24 months. As noted above, this could result in the loss of all IIAS capability (not just OTC prescription processing) beginning January 1, 2011.

Further detail on this issue is provided below. We also request a meeting as soon as possible to discuss this issue and how the current electronic debit card process works for prescribed drugs. As this is a significant change that would impact millions of health debit card cardholders, this issue is very time sensitive.

Discussion

Existing IRS Rules Recognize that Debit Card Purchases Can Be Effectively Substantiated Electronically At the Point of Sale

The IRS initially provided guidance relating to the use of debit cards in connection with health FSAs and HRAs in Revenue Ruling 2003-43. That ruling was limited to cards that can only be used at merchants and service providers that have merchant category codes related to health care. Notice 2006-69 expanded the circumstances in which debit cards could be used in connection with health FSAs and HRAs. In particular, Notice 2006-69 allowed the use of debit cards at merchants that are not health care providers if the merchant uses an inventory information approval system (IIAS) or there is direct third-party substantiation (such as an explanation of benefits (EOB) rollover procedure).² Notice 2007-2 further expanded the permitted use of debit cards by allowing the use of such cards at certain pharmacies and drug stores without an IIAS system if 90% of the store’s gross receipts in the prior taxable year are for eligible medical care expenses (the "90% rule").

This series of guidance recognizes that electronic means of merchant substantiation are both effective in ensuring that applicable legal requirements are met and are cost efficient. Notice 2010-59 indicates continuing interest in the use of electronic verification, and specifically requests comments on new designs for debit card systems that could provide substantiation that an OTC was prescribed as required under the New OTC Rule. As described in the remainder of this letter, SIGIS respectfully submits that no new designs for debit cards are required as the current IIAS system can verify that an OTC was prescribed in accordance with the New OTC Rule.

Current Systems Accurately Substantiate Electronically the Existence of a Prescription for All Prescribed Medicines Through the Use of Methods Consistent with Notice 2006-69

SIGIS recognizes that, as a result of the New OTC Rule, current IIAS processes that allow OTC purchases without verification that a prescription has been provided (in accordance with state law) will no longer be compliant. As noted above, in response, SIGIS has revised its list of approved products accordingly (i.e., to exclude OTC medicines and drugs SKUs so they can not be purchased with a health debit card without a prescription). SIGIS is concerned, however, that the literal language of Notice 2010-59 goes beyond the requirements of the New OTC Rule. In particular, the Notice includes broad language indicating that health benefit debit cards may never be utilized to substantiate prescribed OTC medicine at the point of sale of IIAS merchants, even though current IIAS systems have substantiation mechanisms in place to verify the prescription that otherwise meet the requirements of Notice 2010-59 and Notice 2006-69.

In particular, Notice 2010-59 provides that "[E]xcept as provided below [relating to a transition period and merchants that use the 90% rule] for expenses incurred on and after January 1, 2011, health FSA and HRA debit cards may not be used to purchase over-the-counter medicines or drugs." This language is overly broad, and does not take into consideration the fact that IIAS systems currently, in accordance with Notice 2006- 69, allow for charges for prescribed drugs to be substantiated once the prescription is dispensed by the pharmacist and then purchased with a health debit card. The pharmacist notes on the electronic cash register system that the purchase is for a prescribed drug. This same process is currently used for any prescribed drug (whether OTC or available by prescription only), and is consistent with the requirements of the New OTC Rule.

Under this process, a pharmacist would process and handle a purchase of an OTC with a prescription just as the pharmacist would process and handle a prescription for a drug that can only be purchased with a prescription. Substantiating information which would enable the third party administrator (or IRS agent) to look back to confirm that the actual item was dispensed pursuant to a valid prescription will be retained in accordance with the requirements of Notice 2006-69. Such a process would provide the substantiation that is required under Notice 2010-59. The data retention requirements and retrieval procedures are also required to be supported as a part of SIGIS merchant certification.

Notice 2010-59 provides that OTC purchases must be substantiated before reimbursement may be made and that substantiation is accomplished "by submitting the prescription (or a copy of the prescription or other documentation that a prescription has been issued) for the over-the-counter medicine or drug, and other information from an independent third party that satisfies the requirements under Prop. Treas. Reg. § 1.125- 6(b)(3)(i). Thus, for example, a customer receipt issued by a pharmacy which identifies the name of the purchaser (or the name of the person for whom the prescription applies), the date and amount of the purchase and an Rx number satisfies the substantiation requirement for over-the-counter medicines or drugs, as does a receipt without an Rx number accompanied by a copy of the related prescription."

The current substantiation process that SIGIS uses is consistent with these requirements. In particular:

• The substantiation would be provided by the pharmacist or pharmacist technician before payment is made, i.e., reimbursement through use of the card is not made until after the pharmacist verifies that a valid prescription has been issued; and
• The substantiation would be accomplished by the submission of a prescription to a third party -- the pharmacist or pharmacist technician subject to regulation under state law – for verification and dispensing.

The substantiation process that SIGIS uses today is also consistent with Notice 2006-69, as modified to take into account the New OTC Rule. That is, consistent with Notice 2006-69, the pharmacist, at the time and point of sale, provides information that verifies that the expense qualifies as a valid medical expense after dispensing the drug pursuant to a prescription (taking into account the New OTC Rule). Once the prescription is processed by the pharmacist, the card transaction is initiated and sent to the FSA processer who then allows payment through the card. The process with respect to OTC medicines is similar – if there is an Rx provided for the OTC medicine, it is processed for payment as an Rx. If there is no Rx provided, the item is run against the list of eligible items maintained by SIGIS, from which OTC drugs and medicines are being removed in accordance with the New OTC Rule. Thus, if the item is a medicine or drug, and is not accompanied by an Rx, no payment with a health debit card can be made.

The electronic substantiation process is at least as effective in ensuring that an Rx actually exists as manual, after the fact substantiation that is permitted under Notice 2010-59. Current pharmacy business processes and, in many states, pharmacy regulation, requires strict protocols for the treatment and handling of an Rx, including the dispensing of the drug and issuance of a prescription number. Further, the paper receipt including the Rx number that is permitted under Notice 2010-59 for manual substantiation, will generally be processed by the same persons that would process the electronic verification under the current IIAS system. Thus, there does not appear to be a reason to distinguish between the different methods of verification.

Failure to Allow Use of Debit Cards for Prescribed OTC Medicines Will Adversely Impact the Ability of Plan Participants to Use Debit Cards for Medicines that Can Only Be Dispensed by Prescription

Notice 2010-59 preserves the ability to use debit cards for medicines for which a prescription is legally required. However, as discussed above, current systems for Rx verification process all prescriptions similarly, whether for OTC medicines or medicines for which a prescription is legally required. Due to the interaction of dispensing systems in place at pharmacies today with an IIAS system, merchants cannot distinguish between a medicine for which a prescription is required and an OTC that is prescribed as required under the New OTC Rule. In fact, many state laws require that identical processes apply to process any prescription (whether OTC or not). There is no easy technical solution that could be put in place to resolve this issue in a timely manner.

Thus, as a practical matter, failure to allow the use of debit cards for prescribed OTC medicines will have the effect that debit cards will not be able to be used for prescribed medicines at all. It is likely that this will cause all IIAS based health debit card processes to be shut down while technical changes are made to accommodate a process that differentiates between OTC and other prescription items. As a result, plan participants would be required to return to manual claims processing for all medicines (OTC or otherwise). This may result in delays for plan participants in obtaining reimbursement for their prescription medicines and in some cases could impose financial hardships on them, as well as risk medical issues if they delay filling the prescription as a result. Altering these systems to differentiate between types of prescribed drugs could take years, and involve yet again significant investment on the part of pharmacies, retailers and dispensing systems, as well as card networks, card processors and TPAs, even though current systems provide accurate, reliable verification.

Without modification, Notice 2010-59 will impact the use of FSAs and HRAs (and traditional health plans) well beyond the changes imposed by the New OTC Rule, and will significantly increase costs to plan participants due to the additional administrative burdens, all without need and without increasing substantiation efficiency. Such a result should clearly be avoided.

Summary of Comments: Use of Debit Cards to Purchase OTC Drugs Should be Permitted Where the Pharmacist or Pharmacist Technician Verifies that A Prescription Has Been Provided

SIGIS understands that the IRS needs to be concerned that substantiation is properly supplied. The clarifications proposed by SIGIS assures proper substantiation with appropriate safeguards, because it uses processes that have already been approved for this purpose by the IRS and simply extends them to apply to prescribed OTC medicines and drugs. The proposed changes also ensure that plan participants will not experience delays with respect to their medicines that must be provided by prescription. SIGIS requests that Notice 2010-59 be clarified to allow the continued use of debit cards for OTC purchases where the pharmacist or pharmacist technician validates the existence of a prescription at the point of sale.

We appreciate this opportunity to comment on Notice 2010-59 and look forward to discussing these issues further.

JRH:dsl

LEGAL02/32193540v3

Notes:
1 New Code §106(f).
2 The Notice also expanded the copayment match substantiation method described in Revenue Ruling 2003-43.

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