Patient, Heal Thyself: Why Congress Should Repeal the Medicine Cabinet Tax on Over-the-Counter Drugs

Policy Reports | Health

No. 362
Friday, November 21, 2014
by Devon M. Herrick

Drugs are arguably the most efficient method to treat most medical problems — often substituting for more expensive surgery or hospitalization. 

Lost in the health care debate is another type of drug therapy that costs consumers even less than prescription drug therapy and produces benefits far in excess of its cost. Over-the-counter (OTC) nonprescription medications comprise only about 1 percent of health care spending. Yet nearly 80 percent of the time when Americans have a health ailment, they first reach for a nonprescription drug.  Americans spend an estimated $36 billion annually on nonprescription drugs — most were originally prescription drugs.

Nonprescription drugs could be even cheaper, but one of the funding mechanisms for the Patient Protection and Affordable Care Act (ACA) amounted to a substantial tax increase on OTC drugs. Moreover, many states charge sales taxes on nonprescription drugs.

The new Congress is expected to consider legislation to repeal some of the taxes imposed by the ACA. The tax on OTC drugs is one they should consider repealing. The resulting tax revenue is hardly enough to justify the tax.

Bad Idea: Taxing OTC Drugs. The ACA made OTC drugs ineligible for reimbursement through health reimbursement arrangements (HRAs), flexible spending accounts (FSAs) or health savings accounts (HSAs).  For those who have them, these tax-advantaged accounts lower the cost of medications significantly, because they allow account-holders to purchase drugs with pretax dollars. For example, if an individual can use his pretax income to purchase OTC medication, he escapes a so-called Medicine Cabinet Tax equal to a more than 40 percent. Only a handful of states exempt OTC drugs from state and local sales taxes.  A back-of-the-envelope calculation suggests Americans spend nearly $2 billion annually to pay sales taxes on OTC drugs. By contrast, almost all states that tax OTC drugs do not tax prescription drugs similarly. The dissimilar treatment is counterproductive, because the revenue raised by taxing OTC drugs is a drop in the bucket compared to the value to society of encouraging greater use of nonprescription drugs.

OTC Drugs Reduce Office Visits. Americans collectively see their doctors more than a billion times each year — about half of their visits are to see a primary care physician.  One survey of primary care physicians estimated at least 10 percent of office visits were for conditions that could have been treated at home.  Indeed, eliminating office visits for conditions that don’t require a physician’s care is the primary way nonprescription medications save money and avoid inconvenience.  Furthermore:

  • The average price for a name-brand prescription was $268 in 2011, compared to only $33 for a prescription filled with a generic drug.
  • OTC drug products are available in numerous package sizes; many OTC drugs are $10 or less and will last for months.
  • Americans save themselves (and the health care system) $6 to $7 for every $1 spent on a nonprescription drug. 

All told, 110 prescription drugs, including specific-strength doses of some drugs, have been switched to over the counter since 1975.  Millions of Americans use these drugs. For example, the 20 million Americans who were treating themselves with older, sedating OTC allergy remedies (and the millions whose symptoms go untreated) now have access to Claritin and to several similar antihistamines for a mere fraction of the cost of physician care and prescription Claritin. Another example of a popular prescription drug moved to the OTC market is the anti-ulcer drug Prilosec — the second best-selling drug in 2001. The OTC generic version is currently available for as little as $0.40 apiece at big box retailers — a savings of 90 percent off what the prescription version cost prior to being switched to over the counter. Indeed, when any prescription drug is switched to the OTC market, the price tends to drop sharply.

What Else Is Needed?  When Americans think about medical care, they tend to think of doctors, hospitals and clinics — not about their medicine cabinets. But taking a nonprescription drug is the most common way the majority of Americans encounter the health care system in a given year.  Most of the medical care Americans receive is self-care — at least initially. For most medical conditions, people self-diagnose at the outset and treat their symptoms with OTC drug remedies. Although Americans see their doctors only about three times each year, they pick up an OTC drug more than two dozen times annually. Americans visit a store or pharmacy to purchase OTC drugs eight times more frequently than they see their doctor. And whereas prescription drugs are only available at 54,000 pharmacies across the nation, an additional 700,000 (nonpharmacy) retail outlets sell OTC drugs.

Prior to the Durham-Humphrey Amendment of 1951, patients relied on drugstores to advise them on the appropriate drugs to purchase.  Physicians also sold drugs directly to patients.

Considering the immense benefits of convenient access to nonprescription drugs, it makes little sense to erect barriers to their use. Thus, the Food and Drug Administration should move faster to approve drug makers’ applications to switch appropriate drugs from prescription-only to over the counter. Furthermore, Congress and the states should repeal taxes on nonprescription drugs.

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