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Employee cost-sharing and the welfare effects of flexible spending accounts

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Author Info

  • Jack, William
  • Levinson, Arik
  • Rahardja, Sjamsu

Abstract

Flexible Spending Accounts (FSAs) subsidize out-of-pocket health expenses not covered by employer-provided health insurance, making health care cheaper ex post, but also reducing the incentive to insure. We use a cross section of .rm-level data to show that FSAs are indeed associated with reduced insurance coverage, and to evaluate the welfare consequences of this shift. Correcting for selection effects we find that FSAs are associated with insurance contracts that have coinsurance rates about 7 percentage points higher, relative to a sample average coinsurance rate of 17 percent. Meanwhile, coinsurance rates net of the subsidy are approximately unchanged, providing evidence that FSAs are welfare-neutral. These results show that FSAs may explain a significant fraction of the shift in health care costs to employees that has occurred in recent years.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 90 (2006)
Issue (Month): 12 (December)
Pages: 2285-2301

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Handle: RePEc:eee:pubeco:v:90:y:2006:i:12:p:2285-2301

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Web page: http://www.elsevier.com/locate/inca/505578

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References

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  1. Jonathan Gruber & Robin McKnight, 2002. "Why Did Employee Health Insurance Contributions Rise?," NBER Working Papers 8878, National Bureau of Economic Research, Inc.
  2. Jack, William & Sheiner, Louise, 1997. "Welfare-Improving Health Expenditure Subsidies," American Economic Review, American Economic Association, vol. 87(1), pages 206-21, March.
  3. Dranove, David & Spier, Kathryn E. & Baker, Laurence, 2000. "'Competition' among employers offering health insurance," Journal of Health Economics, Elsevier, vol. 19(1), pages 121-140, January.
  4. Cardon, James H. & Showalter, Mark H., 2001. "An examination of flexible spending accounts," Journal of Health Economics, Elsevier, vol. 20(6), pages 935-954, November.
  5. Helen Levy, 1998. "Who Pays for Health Insurance? Employee Contributions to Health Insurance Premiums," Working Papers 777, Princeton University, Department of Economics, Industrial Relations Section..
  6. Pauly, Mark V, 1986. "Taxation, Health Insurance, and Market Failure in the Medical Economy," Journal of Economic Literature, American Economic Association, vol. 24(2), pages 629-75, June.
  7. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
  8. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
  9. repec:fth:prinin:398 is not listed on IDEAS
  10. Dowd, Bryan & Feldman, Roger & Maciejewski, Matthew & Pauly, Mark V., 2001. "The Effect of Tax-Exempt Out-of-Pocket Premiums on Health Plan Choice," National Tax Journal, National Tax Association, vol. 54(n. 4), pages 741-56, December .
  11. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 251-80, Part I, M.
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Cited by:
  1. Barton H. Hamilton & James Marton, 2008. "Employee choice of flexible spending account participation and health plan," Health Economics, John Wiley & Sons, Ltd., vol. 17(7), pages 793-813.
  2. Cogan, John F. & Hubbard, R. Glenn & Kessler, Daniel P., 2011. "The Effect Of Tax Preferences On Health Spending," National Tax Journal, National Tax Association, vol. 64(3), pages 795-816, September.
  3. John F. Cogan & R. Glenn Hubbard & Daniel P. Kessler, 2007. "Evaluating Effects of Tax Preferences on Health Care Spending and Federal Revenues," NBER Chapters, in: Tax Policy and the Economy, Volume 21, pages 65-82 National Bureau of Economic Research, Inc.
  4. John F. Cogan & R. Glenn Hubbard & Daniel P. Kessler, 2006. "Evaluating Effects of Tax Preferences on Health Care Spending and Federal Revenues," NBER Working Papers 12733, National Bureau of Economic Research, Inc.

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