NCPA - National Center for Policy Analysis

Repeal the Medicine Cabinet Tax on OTC Drugs

November 21, 2014

When Americans think about medical care, they generally think about hospitals, doctors and prescription drugs. But in a new report from the National Center for Policy Analysis, Senior Fellow Devon Herrick says that many overlook the importance of inexpensive, over-the-counter (OTC) drug therapy; just 1 percent of health spending goes toward OTC drugs, despite that Americans first reach for a nonprescription drug 80 percent of the time when they have a health ailment.

How much cheaper are OTC drugs than their prescription drug counterparts?

  • 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. 

Still, they could be cheaper, says Herrick. When Congress passed the Affordable Care Act, it included what was essentially a tax on OTC drugs, because it made OTC medicines ineligible for reimbursement through health reimbursement arrangements (HRAs), flexible spending accounts (FSAs) and health savings accounts (HSAs). These accounts allow the Americans who have them to deposit pretax dollars into their accounts, which can then be used for medical expenses. Prior to the ACA, account holders could use those pretax dollars to purchase OTC drugs, resulting in a significant savings on medication. For example:

  • A middle-income family may face a marginal tax rate of 25 percent, a payroll tax of 15.3 percent, and possibly a state and local tax of 5 percent.
  • Thus, if an individual can use his pretax income to purchase OTC medication, he escapes that 45.3 percent tax.
  • This so-called Medicine Cabinet Tax is equal to a price hike of more than 40 percent for many consumers buying drugs over the counter.

OTC drugs can still be purchased through a tax-preferred account if they are prescribed by a physician. However, Herrick says the effort of obtaining a prescription for an OTC drug would negate any savings from choosing the OTC drug. Herrick encourages the new Congress to repeal the Medicine Cabinet Tax. Over-the-counter drugs reduce doctors' office visits and cost less than prescriptions, saving Americans, and the health system, money.

Source:  Devon Herrick, "Patient, Heal Thyself:  Why Congress Should Repeal the Medicine Cabinet Tax on Over-the-Counter Drugs," National Center for Policy Analysis, November 21, 2014. 


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