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The Distributional Effects of Health Reform Limits on Flexible Spending Accounts

Author

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  • Cardon James H.

    (Brigham Young University)

  • Moore Joel

    (University of California, Los Angeles)

  • Showalter Mark H.

    (Brigham Young University)

Abstract

Flexible spending accounts (FSAs) are a widely used arrangement that allow employees to pay for qualified out-of-pocket health expenses with pre-tax dollars. The tax preference given to FSAs has been controversial and recent health care law (Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act) limits the tax exclusion to an inflation-adjusted value of $2,500 (2013 $s). The limit is estimated to increase federal payroll and income tax receipts by $13 billion between 2013 and 2019. But the welfare implications of this change are unclear.This paper uses a unique panel dataset to explore the demographic profile of households likely to be affected by the tax increase. We use a sample of 19,322 households observed over the period 1998–2008. The data include FSA expenditures, insurance claim information for covered medical and dental expenditures, and household demographic information. We explore patterns of FSA usage by income and health status.We find that households likely to be affected by the tax increase disproportionately tend to be households experiencing one or more chronic health conditions. The existence of chronic illness is associated with relatively high and persistent medical expenses and also with relatively older and wealthier households. We estimate an average tax increase of $101 in 2013 for 13.9 million households with an FSA.

Suggested Citation

  • Cardon James H. & Moore Joel & Showalter Mark H., 2012. "The Distributional Effects of Health Reform Limits on Flexible Spending Accounts," Forum for Health Economics & Policy, De Gruyter, vol. 15(2), pages 1-24, November.
    • Handle: RePEc:bpj:fhecpo:v:15:y:2012:i:2:p:1-24:n:7
    DOI: 10.1515/1558-9544.1310
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    References listed on IDEAS

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    1. Congressional Budget Office, 2010. "The Long-Term Budget Outlook," Reports 21546, Congressional Budget Office.
    2. Congressional Budget Office, 2012. "The 2012 Long-Term Budget Outlook," Reports 43288, Congressional Budget Office.
    3. 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, July.
    4. Congressional Budget Office, 2012. "The 2012 Long-Term Budget Outlook," Reports 43288, Congressional Budget Office.
    5. repec:cbo:report:215461 is not listed on IDEAS
    6. James H. Cardon, 2010. "Flexible Spending Accounts and Adverse Selection," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 145-153, March.
    7. Congressional Budget Office, 2012. "The 2012 Long-Term Budget Outlook," Reports 43288, Congressional Budget Office.
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    Cited by:

    1. Jessica Leight & Nicholas Wilson, 2020. "Framing Flexible Spending Accounts: A Large‐Scale Field Experiment on Communicating the Return on Medical Savings Accounts," Health Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 195-208, February.

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