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

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

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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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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  1. Jack, William & Sheiner, Louise, 1997. "Welfare-Improving Health Expenditure Subsidies," American Economic Review, American Economic Association, vol. 87(1), pages 206-21, March.
  2. 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.
  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.
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  7. 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..
  8. Jonathan Gruber & Robin McKnight, 2002. "Why Did Employee Health Insurance Contributions Rise?," NBER Working Papers 8878, National Bureau of Economic Research, Inc.
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  10. 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.
  11. 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.
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  13. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
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