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

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  • 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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Suggested Citation

  • Jack, William & Levinson, Arik & Rahardja, Sjamsu, 2006. "Employee cost-sharing and the welfare effects of flexible spending accounts," Journal of Public Economics, Elsevier, vol. 90(12), pages 2285-2301, December.
  • Handle: RePEc:eee:pubeco:v:90:y:2006:i:12:p:2285-2301
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    References listed on IDEAS

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    1. 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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    3. 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..
    4. 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.
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    8. Gruber, Jonathan & McKnight, Robin, 2003. "Why did employee health insurance contributions rise?," Journal of Health Economics, Elsevier, vol. 22(6), pages 1085-1104, November.
    9. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 251-280, Part I, M.
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    13. repec:fth:prinin:398 is not listed on IDEAS
    14. 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(4), pages 741-756, December.
    15. 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..
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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. 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.
    3. 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.

    More about this item

    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

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