Health Care Payment Cards: Past, Present, and Digital Future

Health care payment cards let employees pay for health care expenses using funds from a specific account. This is the simplest way to purchase health care, since users can pay by swiping the card.  Much like a debit card, the expense will be deducted from the account.

In the 1960s, inflation increased the cost of health benefits, so employers started mandating deductibles and excluding coverage for medical costs. As a result, employees experienced increased medical expenses. In response, the IRS created flexible spending accounts (FSAs) in 1978, which let employees pay pre-tax dollars for medical expenses not covered by their employer’s health plan.

Originally, due to IRS requirements, FSAs were based on a reimbursement model—meaning account holders would purchase an item with their own money, then manually send a receipt to the administrator and wait for their claims to be reimbursed. Although it is still possible to use an FSA this way, it can be a bit more cumbersome, and increases the likelihood that many FSA funds may go unspent by the end of the plan year.

To solve this problem, in 2000, employers began using health care payment cards to make it easier for participating employees to access their FSA accounts.

To serve employees covered by high deductible health plans who wanted similar pre-tax benefits, the government created health savings accounts (HSAs) in 2003. The new accounts also offered the benefit of health care payment card convenience.

In recent years, using a health care payment card to pay for FSA and HSA eligible expenses has soared. According to the 2019 Visa Annual Healthcare Research Report, 82% of FSA users and 62% of HSA users are card holders.

With health care payment cards, account holders can directly pay for expenses at approved merchants. The IRS requires businesses like pharmacies, grocery stores, and wholesale clubs to have an inventory control system that identifies eligible expenses for health care payment cards. The system, called Inventory Information Approval System (IIAS), reduces rejected claims and the need to submit a follow-up receipt.

The IRS created an exception to IIAS requirements for specialized merchants that primarily sell medical goods and prescriptions, like pharmacies within hospitals or medical buildings. These merchants can instead register under the IRS’ “90% Rule” program, which requires 90% or more of a merchant’s transactions come from sales of qualified medical expenses. These merchants also accept payment cards with a follow-up receipt.

Employees can check balances online, so they know exactly how much is in their account. When a user swipes the payment card, the system makes sure of two things: coverage is active, and sufficient funds are available in the account for the full amount. Users can also swipe the card for the amount left in the account and pay the difference with another form of payment.

There are thousands of eligible expenses for tax-free purchases with a card, including prescriptions, doctor’s office copays, deductibles, and over-the-counter treatments. Everyday items like reading glasses and sunscreen even apply. In fact, many general consumers don’t realize that sunscreen is an eligible expense!

While medical expenses are usually assumed to be covered, employees are sometimes surprised about the expanse of coverage. Not only are physical items covered, like hearing aids, breast pumps, and compression sleeves, but so are services like chiropractic appointments, acupuncture (with a note of medical necessity from a physician), and alcohol addiction treatments.

Click here to see example eligibility lists for HSAs, FSAs, and Health Reimbursement Arrangements (HRAs).

Convenience and simplicity are the biggest reasons people use health care payment cards. For instance, there is no extra paperwork required since the money is taken directly out of an account. As long as the funds are in a user’s account, they can make on-the-fly purchases, including over-the-counter items. As an added benefit, a user can set aside these funds before taxes are taken out.

In Visa’s Annual Healthcare Research report, 89% of FSA card users surveyed said they found it easy to use, plus thought it was more convenient than having to be reimbursed:

Health care payment cards exist to give employees an easier and quicker option to pay for their medical purchases. As account holders become accustomed to using them whenever they have a medical purchase, they will reduce reimbursement needs and claims paperwork. As a result, participants will take more personal control over their health care payment options.

With the continuing development of financial technology (aka fintech), companies will be better able to share information over all health care platforms. The race to process data, both in higher quantities and at faster speeds, is always a goal.

The development of digital cards is another way to aid users, with the benefit of never having to physically produce the card. Instead, the digital card option will make health care purchases even more convenient.

Even with all the technological development, companies will need to continue to pay attention to the existing barriers for health care payment cards.

Visa’s June 2019 report, Understanding the Emotions Surrounding FSA/HSA Accounts, concluded, “While users of FSA and HSA accounts clearly see the benefits, others are limited by a few main barriers, including a lack of awareness, confusion about what is offered, and a lack of relevance (among others.)”

(You can hear more about HSA perceptions from the 2019 report in the webinar we held with Visa here.)

Another concern is improving access for all income populations, to ensure that everyone has the same health care opportunities.

By concentrating on digital solutions, increased communication, and reducing barriers, health care payment card options will only improve and increase.