Employee choice of flexible spending account participation and health plan

John M Olin School of Business, Washington University in St. Louis, St. Louis, MO, USA.
Health Economics (Impact Factor: 2.14). 07/2008; 17(7):793-813. DOI: 10.1002/hec.1296
Source: PubMed

ABSTRACT Despite the fact that flexible spending accounts (FSAs) are becoming an increasingly popular employer-provided health benefit, there has been very little empirical study of FSA use among employees at the individual level. This study contributes to the literature on FSAs using a unique data set that provides three years of employee-level-matched benefits data. Motivated by the theoretical model of FSA choice presented in Cardon and Showalter (J. Health Econ. 2001; 20(6):935-954), we examine the determinants of FSA participation and contribution levels using cross-sectional and random-effect two-part models. FSA participation and health plan choice are also modeled jointly in each year using conditional logit models. We find that, even after controlling for a number of other demographic characteristics, non-whites are less likely to participate in the FSA program, have lower contributions conditional on participation, and have a lower probability of switching to new lower cost share, higher premium plans when they were introduced. We also find evidence that choosing health plans with more expected out-of-pocket expenses is correlated with participation in the FSA program.

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    ABSTRACT: Models used to derive optimal contributions to health care flexible spending accounts (FSAs) typically assume an employee's household annual out-of-pocket health care expenses are an ab-solutely continuously random variable. This assumption, however, ignores the fact that some em-ployees may be able to accurately predict a portion of their household annual out-of-pocket health care expenses and often actually incur only those expenses during the plan year, implying that a mixed random variable may be more appropriate. In addition, data have shown that employees are setting contributions at lower levels than existing absolutely continuous models would suggest is optimal. Using a mixed model of household annual out-of-pocket health care expenses we prove that it is often optimal for employees to contribute an amount equal to their household annual predictable out-of-pocket expenses, thus avoiding the risk of forfeiture. We also propose a practical rule of thumb that employees may use for setting their FSA contributions. Overall, we recommend that employees use their FSAs to cover only their highly predictable out-of-pocket health care expenses rather than use their FSAs as a contingency fund to pay for unlikely or unexpected out-of-pocket health care expenses.
    North American Actuarial Journal 07/2011; 15(3). DOI:10.1080/10920277.2011.10597630

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