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). 08/2008; 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.
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    ABSTRACT: I model the interaction of flexible spending accounts (FSAs) and conventional insurance. I show that FSA participation reduces the desired level of insurance coverage. I also show that FSA participation can reduce the total tax cost of health insurance premium and FSA contribution exclusions.
    The Geneva Risk and Insurance Review 09/2011; 37(2). · 0.63 Impact Factor
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    ABSTRACT: Flexible spending accounts (FSAs) are an important component of health care financing in the United States. Based on a national survey of employer-sponsored health plans, 83 percent of large employers offer flexible spending accounts for health expenses (Mercer, 2008). The average annual contribution amount for those who use FSAs was $1,385 in 2008. Based on 2004 data, the Congressional Budget Office estimated that about 10 million private-sector workers used a FSA for out-of-pocket health expenses (CBO, 2006). The government does not produce a tax expenditure amount for health FSAs alone, but it is likely in the range of $7 billion to $12 billion for 2008.Flexible spending accounts are usually provided through employer “cafeteria plans.” Account holders select an amount to be withheld from their paycheck over the upcoming year. Those monies are put into a FSA and the account holder can use those funds to pay for out-of-pocket health care costs. The key advantage of these accounts is that they escape both income and payroll taxes. But any monies left in the account at the end of the period revert to the employer, generally known as the ‘use-it-or-lose-it’ provision.The use-it-or-lose-it provision adds a substantial amount of risk to the usage of FSAs. Forfeitures could exceed the tax savings, especially for low-income users of FSAs. The Congressional Research Service reports that approximately 1 in 8 FSAs for federal employees forfeited some amount in the first year FSAs were offered (2003), with an average forfeiture of $220 (CRS, 2005). In 2005, the Treasury Department made a major modification to the use-it-or-lose-it provision: account holders are now allowed a ‘grace’ period for using FSA funds. Account holders whose benefit period is based on the calendar year are now allowed to use those funds to pay for expenditures through March 15 of the following year. This means that if an account holder is has excess funds in their account at year end, the account holder can reduce their election amount for the upcoming year by the amount of the excess. This substantially reduces the forfeiture risk.Our research uses a unique panel dataset from a medium sized benefits firm to explore how consumers use FSAs over time. In particular, we test the effect of the new ruling on FSA usage. To our knowledge, this is the first panel data study of flexible spending accounts. The data includes insurance claim information, and FSA election and usage information for approximately 20,000 employees (plus dependents) of about 50 firms from 1998 to 2007. The data also includes income, gender, age, marital status, residence state, household size, and tenure at job. Preliminary results show little effect of the grace period on election amounts and expenditure patterns.
    Applied Economics 06/2010; · 0.46 Impact Factor

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