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: 2.23). 07/2008; 17(7):793-813. DOI: 10.1002/hec.1296
Source: PubMed


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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    • "''just trying to put food on the table,'' are ''put off'' by the requirement that money is first deducted from wages and then later used to pay next month's insurance bill. This reluctance is confirmed by studies showing low use of FSAs by lower-wage workers, even when they incur the dependent care and medical costs that FSAs cover (Feldman and Schultz 2001; Hamilton and Marton 2008). Insurance agents said they are not highly motivated to encourage section 125 plans for individual insurance. "
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    ABSTRACT: To assess the impact of state laws requiring or encouraging employers to establish "section 125" cafeteria plans that shelter employees' premium contributions from tax. Available descriptive statistics, 65 key-informant interviews, and relevant documents in study states and nationally, 2008-2009. Case studies were conducted in Indiana, Massachusetts, and Missouri--three states adopting laws in 2007. Descriptive quantitative information came from insurers, regulators, and surveys of employers. In each state, 15-17 semistructured but open-ended interviews were conducted with insurance agents, insurers, government officials, and third-party administration firms, and 29 informed sources were interviewed from a national perspective or other states. Key informants were selected based on their known or reported experience, in a "snowball" fashion until saturation was reached. Interview notes were coded for systematic analysis. Finally, relevant rulings, brochures, instructions, marketing materials, and other documents were collected and analyzed. Despite the potential for substantial cost savings, use of section 125 plans to purchase individual insurance remained low in these states after 1 or 2 years. Absent a mandate, few employers were strongly motivated to offer these plans in order to retain an adequate workforce, and uncertainty about federal legality deterred doing so. For smaller employers, benefits to owners did not outweigh administrative complexities. Nevertheless, few downsides were found to states mandating or encouraging these plans. In particular, there is little evidence that many employers dropped group coverage as a result. Section 125 plans remain a limited tool for states to reduce the inequitable tax treatment of individually purchased insurance, but a complete remedy requires reform of federal tax law.
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    • "12 While our data do not report take-up rates, we know from other sources that take-up rates are typically low. At one major public university, around 15% of employees participate in the FSA, and most participants are high-income individuals with large medical expenditures (Hamilton and Marton, 2006). exacerbates the overuse of subsidized health care. "
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    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 coinsurancerates 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.
    Full-text · Article · Feb 2006 · Journal of Public Economics
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