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Employee Cost-Sharing and the Welfare Effects of Flexible Spending Accounts

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Author Info
William Jack
Arik Levinson
Sjamsu Rahardja

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11315.

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Date of creation: May 2005
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Handle: RePEc:nbr:nberwo:11315

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Find related papers by JEL classification:
D60 - Microeconomics - - Welfare Economics - - - General
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

References listed on IDEAS
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  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June. [Downloadable!] (restricted)
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Cited by:
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  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!]
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