Flexible spending accounts, or FSAs, are near to Frank McCree's heart — and heartburn. As director of outpatient services for Carolinas Health System in Charlotte, North Carolina, McCree oversaw the acceptance of FSA purchases for seven retail pharmacies and a mail-order pharmacy serving 40,000 employees and their dependents. And he took the heat when employee FSA debit-card purchases were denied at the system's own mail-order pharmacy.

(GETTY IMAGES / PHOTODISC/NICK KOUDIS)

McCree has plenty of company. Independent and small chain pharmacies nationwide are seeing FSA card transactions declined. Long-time patients are being pushed out of independent pharmacies and into chains.

The problem goes back to FSA regulations. Pharmacies must meet inventory information approval system (IIAS) compliance requirements created by the Internal Revenue Service, which regulates tax-exempt FSA plans. The rules are designed to ensure that only prescription drug and other products specifically allowable under FSAs are purchased using FSA credit cards, said Greg Phillips, president and CEO of Emporos Systems, a point-of-sale (POS) vendor in Charlotte, North Carolina.

Early proposals would have required all pharmacies to use a POS system certified by the Special Interest Group of IIAS Standards, or SIGIS. Quinlan said. NCPA and other pharmacy groups objected, pointing out that SIGIS-compliant systems start at about $10,000.

So the IRS created an exception, the 90-percent rule. Independents and small chains are exempt from SIGIS compliance if at least 90 percent of gross receipts for the previous taxable year consisted of products that qualify as expenses for medical care under Section 213(d) of the IRS code. That includes prescription drug products and certain over-the-counter (OTC) items such as bandages.

The typical NCPA member has 92 percent prescription-only sales and easily qualifies for the 90-percent exemption, Quinlan added. McCree opted for the 90-percent rule because Carolinas' mail-order pharmacy is 100 percent prescription drugs.

The 90-percent rule looked good for everyone. For pharmacy patients, anything charged on their FSA cards, including prescription drug copays, deductibles, and health-related OTCs, was purchased with tax-exempt FSA funds. Pharmacies could continue to meet patients' FSA needs. Emporos and other vendors offered turnkey FSA compliance without the expense of a full POS system.

But the 90-percent rule costs FSA plan administrators. Requirements for SIGIS-certified POSs were put in largely because such systems automatically track individual items in each sale and file claims with FSA administrators electronically. That gives IRS auditors an easy-to-follow electronic trail verifying the exempt status of every transaction. Pharmacies that fall under the 90-percent rule lack POS documentation. Plan sponsors must collect and index paper records for the IRS.

"Some benefit administrators are requiring members to use specific pharmacy networks, generally the large chains," Phillips said. "Their purpose is to eliminate paperwork, so they refuse to accept anything under the 90-percent rule. The IRS encourages administrators to observe the 90-percent rule, but there is no mandate."

That's what fired McCree's heartburn. The plan administrator accepted the SIGIS-compliant POS system used in Carolinas' retail pharmacies, but turned thumbs down on 90-percent-rule mail-order sales. McCree is adding POS to his mail-order operation.

"Thank God for Greg Phillips and Emporos," McCree said. "He saved us a world of hurt with our employees. If you don't have a POS system, you're out of luck when it comes to FSA sales."