our child is sick. It's three in the morning, and you're at the pharmacy. The two of you have been waiting almost an hour to get her prescription filled. To say you're both ready to go home is an understatement. At this moment you realize your insurance verification information is at home, on the kitchen table.

Now you have to pay for the medication out of pocket and wait for reimbursement from the carrier. There is, however, another solution. The convenience associated with using debit cards has made them an increasingly popular payment method among consumers. That sense of convenience is expanding debit card use even further.

As an addition to benefits packages, many companies now offer employees debit card-accessible bank accounts that let them pay for health care expenses, including prescriptions.

How They Work

Both employers and employees contribute to these benefit accounts, which are known as flexible savings (FSA), health reimbursement (HRA) and health savings (HSA) accounts.

They are structured in much the same way as 401k plans: Employees decide how much of their pretax paycheck to deposit into the accounts every pay period. The money in the accounts is exempt from federal and most state income taxes, as well Social Security and Medicare contributions.

Rob Thurston, President of Human Resources Consulting Group Inc., an international employee benefits advisory firm based in Provo, Utah, said that because of the tax-free nature of the accounts, both employers and employees will greatly benefit. "This has a real savings to both the employer and the employee, if the employer encourages the employee to put money into the account," Thurston said.

Unlike a 401k, however, which carries severe penalties for pre-retirement withdrawal of funds, the benefit accounts are designed specifically for use on an as-needed basis.

In addition to health related pretax benefit accounts, employers also offer tax-free savings for work-related transportation and dependent care; these accounts are also accessible by PIN- or signature-based debit transactions.

These types of savings accounts will create opportunities for ISOs/merchant level salespeople (MLSs). As the use of benefit debit cards increases, a wider variety of merchants will accept them.

But even as the issue of interchange fees is somewhat of a sticking point, he sees progress on the horizon; in fact, interchange might help spur the cards' growth.

"There is a lot of movement and discussion on this [interchange] issue," Thurston said. "One of the reasons is that the bank interchange fee for an HSA debit card transaction will probably be much simpler. There is less money going through, and it's a simpler transaction.

"I see more and more merchants will be able to afford to get into the business to offer credit and debit card [acceptance]," he said.

Benefit accounts are receiving a great deal of government publicity. "The Bush administration is really promoting them," Thurston said. "That's where the focus is, that's where the push is. As a result, debit cards are a fantastic way to provide access to these accounts."

"Any sort of employee benefit that can be linked to a debit card is offered," said Tom Torre, Vice President of Operations at MBI, an electronic benefit payment systems provider.

"When you put more cards in more people's hands, money that was once outside the card networks will now be available."

MBI's line of benefit cards covers such diverse programs as parking and daycare.

The Expanding Player List

The growth of the market creates opportunities; as that happens, more players enter the field, increasing competition and lowering price points.

"What we've seen in the last three years is a lot more competition which is driving the cost for these cards down," Thurston said. "As more banks and credit card issuers enter this market space, it will be good for the industry because it will drive down the price."

For employers considering implementing the cards as an employee benefit, there's no time like the present. "As an employer or an administrator, now is the time to look at offering this type of option," Thurston said.

"If I was a debit card provider or a bank, I would definitely consider entering this market space. There is so much growth and so many employers interested in doing this right now," he said.

The largest issuers of the health care and benefit-specific debit cards are San Mateo, Calif.-based WageWorks; Avon, Conn.-based Evolution Benefits Inc.; New York City-based Motivano Inc.; and Waltham, Mass.-based MBI. Through a recent agreement, Genpass Inc. will process all of MBI's benefit account debit transactions.

In addition, Metavante Corp., a major issuer of debit cards, began expanding its card provider services to the employee health benefits arena in mid-2004.

Uncle Sam's Two Cents

Because the funds attached to the debit cards are tax exempt, methods must be instituted to ensure the money is spent only on what it's meant for.

This dilemma is highlighted by the ability to use the benefit debit cards to purchase prescription drugs from both online and brick and mortar pharmacies, and by the fact that medicine is not the only product people buy at pharmacies.

So how do issuers, retailers, insurance companies and employers ensure they have Uncle Sam's blessing?

When people make purchases with FSAs and HRAs, applicable items are identified with both merchant and product codes, and the cards have a built-in mechanism that ensures that cardholders cannot buy non-approved items.

HSAs are another matter. They are specifically designed to allow the user discretionary spending and are not connected to merchant or product codes. However, they are intended for health related expenses only.

Thurston sees this as a potentially major problem for consumer tax fraud. "As consultants, we have asked the White House as well as the Internal Revenue Service and the Treasury Department to restrict the usage of HSAs solely to health care that's been documented and verified," he said.

"However, the feeling is that this is the employee's money, it's in a separate account, and the employee can use it for any purpose, but if they're ever audited, they'll have to prove it was used for health care." In Action Over the past year and a half, Drugstore.com Inc. has entered into several partnerships with FSA providers to track and manage FSA purchases. These collaborations, including with MBI, DataPath and WageWorks, are ensuring that the money in an FSA is used only for approved items. Each transaction is capable of being tracked, monitored and cataloged.

Chris Pierce, Vice President of Health Care Services and Chief Pharmacy Officer at Drugstore.com, said that its partnerships with FSA providers have been a success.

The FSA store is "working out very well," he said. "Customers can easily identify FSA-approved products and the paperless processing with such companies as MBI is a huge benefit for consumers.

"Overall participation and dollar sales have been very good and we are continuing to expand our store with products and partnerships," Pierce said.

The programs seem to be working smoothly at Drugstore.com . FSA-eligible items at the pharmacy are tagged, and MBI's processing partner, Genpass, works with the pharmacy to track the purchases. An electronic receipt is then generated and sent to the IRS for approval.

If a person also wishes to purchase non-FSA approved items, they will be prompted to use a different form of payment. Receipts can be generated at the time of purchase or at any time by logging onto Drugstore.com .

The Future

Torre said that it is still easier for major online retailers, such as Drugstore.com, to accept the benefit debit cards.

As partnerships within the market space make it easier for retailers and processors to differentiate between authorized and unauthorized purchases, the goal is to expand the programs for wider use at brick and mortar locations. MBI recently began discussing a partnership with Walgreens. Like Drugstore.com, it has the BIN numbers of the cards and can sort through the transactions to determine which purchases are eligible and which are not.

Within the next few years small and large online and brick and mortar retailers will be able to authorize FSA transactions in real time. This is where the real expansion of merchant card acceptance begins, according to Torre.

For ISOs/MLSs, the more options, the merrier.