Prepaid Benefits Cards: The Next Generation

Benefits advisors need to know how debit card technology can help employers make consumer-directed health plans work more smoothly.

As health insurance becomes more complex, employers are turning to the familiar technology to ease some of the confusion associated with the shift to the new plans.

The cards give consumers a way to withdraw pre-tax funds from benefits accounts–including health savings accounts, health reimbursement arrangements and flexible spending accounts–to pay for qualified health care expenses without filing paper claims.

Consumers are already comfortable with debit card technology. The cards offer consumers help with accessing the funds in various employer-sponsored benefit accounts, and they permit consumers to track purchases and balances online, 24/7.

Both health care providers and consumers are embracing prepaid cards because the card systems are so convenient and easy to use. Soon, swiping a benefits card when picking up a prescription will be as common as swiping a credit card at the grocery store.

Back in the 1990s, consumers used prepaid benefits cards simply to make payments. Since then, major credit card associations and card processors have worked together to make the cards sophisticated claim adjudication devices that allow for real-time information retrieval. Modern magnetic-stripe debit cards can pull extensive amounts of financial information from benefits accounts, rather than simply helping a consumer make a payment.

Advances in technology also have transformed the benefits card from a tool that can draw payments from a single account into a multi-account tool. Administrators can stack several different accounts–including FSAs, HRAs and HSAs–on a single card.

A third change, the introduction of automated, ‘auto-substantiation’ technology, gives card-based systems the ability to verify that benefits card transactions involve health-related products or services. The systems make paper-free transactions possible because they check to see whether purchases of goods or services meet Internal Revenue Service eligibility standards.

The popularity of cards highlights the movement toward greater acceptance of consumer responsibility in health care. Cards are a convenient way to enable consumers to make direct payment from health care accounts to providers. When consumers swipe cards for payment, their awareness of health care costs increases, and they are given incentive to make better decisions about living healthy lifestyles and selecting quality providers to reduce out-of-pocket costs.

Upcoming trends

Use of debit cards to power tax-advantaged health care accounts has increased steadily over the past several years. It is now estimated that approximately 30% of FSAs use a debit card. Increasingly, employers are asking their administrators to provide a card, and more administrators are offering cards to their employer customers. Innovations this year will further streamline card operations and are expected to accelerate the adoption curve. Industry observers predict that as many as 80% of all FSAs will come with cards in 3 years.

The most significant new development in health care benefit card technology is being driven by an Internal Revenue Service mandate. Currently, all grocery stores, discount stores, department stores and online pharmacies that accept benefit debit cards must have an Inventory Information Approval System in place. An IIAS separates eligible from ineligible items automatically. A benefit card can then be swiped for the eligible purchases only. By Jan. 1, 2009, freestanding pharmacies also must be IIAS compliant. Almost 100 supermarket, discount stores and pharmacy chains already have implemented IIAS, with more planned this year. This will significantly improve the percentage of transactions that can be electronically substantiated, thus reducing the need to provide receipts.

Looking ahead, additional innovations–including the use of benefit cards to pay wellness program rewards, verify eligibility and provide credit lines–all on a single card–may become standard features. These changes, which further highlight the movement toward consumerism, are being tested on a limited basis in the market today.