Experts are predicting more growth for prepaid debit cards linked to flexible spending accounts, health savings accounts and health reimbursement arrangements. Often, it's the health care equivalent of online shopping: quick, easy, paperless and hassle-free.

"More employers are open to offering employees a debit card. More employees are becoming card-savvy," observes Mary Liu, an FSA/HSA product director at WageWorks, a San Mateo, Calif.-based firm that administers FSA, HSAs, HRAs and health care cards.

Across the country, "we are seeing a lot of employer interest in implementing these cards," says Carol Tavella, a senior manager at SMART, a Devon, Pa.-based consulting firm. The employers that aren't interested are the ones with very high turnover, she adds.

Chris Byrd, executive vice president at Evolution Benefits, an Avon, Conn.-based provider of prepaid benefit cards, also reports that there has been an uptick in patients using prepaid cards, interest from employers and electronic validation rates. About 30% to 35% of FSA participants nationwide have a prepaid card for the account, Byrd estimates.

"The FSA market and the debit card market are much savvier than they were years ago," partly because of rising health care costs and the influx of high-deductible health plans, Liu adds.

Validating on the spot

Under rules the IRS issued in 2006, purchases made with FSA cards can be automatically approved if the charge occurs with a merchant that uses an inventory system to track the item name and purchase date. If that is not the case, the employer must require a receipt from the employee or additional information from an independent third party, such as an insurance company, before the charge is reimbursed. Self-substantiation, or a statement from the employee without a receipt, is not sufficient.

To qualify for automatic substantiation, supermarkets, grocery stores, discount stores and wholesale clubs that do not have a merchant category code related to health care were required to have the proper inventory system by Dec. 31, 2007. Pharmacies must have the inventory system in place by Dec. 31, 2008.

"There's no more of that pay-and-chase, or very little of it," Liu notes.

Another new, innovative feature available with some cards is the ability to pre-schedule payments. For example, if you have a monthly appointment with a physical therapist, chiropractor or orthodontist, you could schedule payments for the next six months so that you can take care of it faster and don't have to worry about missing one of the payments.

Stacking

Another recent development in prepaid debit cards is stacking, or linking multiple accounts to the same card. If an employee has an FSA and an HSA, the money will come out of the correct account when the card is swiped at the pharmacy or the doctor's office. The employee doesn't have to keep track of multiple cards or multiple card companies.

Stacking is "becoming more important and more popular," Byrd observes, partly because of the convenience. As a patient, "I don't want to have to figure out which card to pull out. I don't want to have to be such an expert in benefits."

Stacking has some advantages for employers, too, since they may be able to negotiate a better price based on having several plans with the same vendor, Byrd says. "[Employers] are starting to offer the combination of accounts more frequently," he adds.

Cards boost participation

According to Celent, a research and consulting firm based in Boston, there are 19,000 FSAs this year, and that's projected to jump to 20,000 in the next four years. Of those FSAs, 7,672 are card-enabled, and that's predicted to grow to about 12,000 next year and 16,000 by 2012.

There are 1,062 multipurpose, or stacked, cards this year, and that's predicted to grow to about 3,000 next year and 16,500 by 2012, Celent reports.

Debit cards have helped to increase participation levels in FSAs and HSAs because consumers "felt it was less hassle," Liu notes.

Tavella agrees: A prepaid card "usually doubles or triples their participation in an FSA account. As employers continue to shift more cost onto employees, the debit cards help employees by providing them with immediate access to funds. They don't have to take the money out of their pocket at the provider. It does sometimes help streamline the reimbursement process, and it does help employees save money on income tax. Employers have a win in this, as well, because they save money on FICA taxes."

In addition, the card "allows [workers] to manage their funds better," Byrd notes.

According to a 2007 survey from the Network Branded Prepaid Card Association, 81% of workers who have a prepaid health care card are extremely or very satisfied with their FSA, versus 66% of FSA users without a prepaid health care card. About 80% of consumers say the process of submitting receipts and being reimbursed is overly cumbersome.

Communication is a key to success for debit cards, as with other benefits, experts say. Some employees may get frustrated if they don't know where they can use their card or what items they can buy with the card. (See below.)

"The average participant may not be card-savvy and may just assume that they can use it anywhere," Liu remarks.

Tavella recommends using multiple communication formats and giving real-life examples. "The use of the card needs to be linked to everyday life in the communications," she says. "They need to have actual examples of how to use the card."

Looking ahead, Liu predicts a trend toward using online claims and electronic payments. Consumers "are looking for more ways to submit their paper receipts online, versus faxing or mailing," she says.

"I don't know if we're there yet, but I think that's where the industry is going next."

See the full list on the IRS Web site at IRS Web site.