Flexible Spending Accounts Research Articles

Framing Flexible Spending Accounts: A Large-Scale Field Experiment on Communicating the Return on Medical Savings Accounts.

Tax-preferred health savings devices such as Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) offer employees potentially valuable financial instruments for directing pre-tax earnings to eligible medical expenses. Despite their increasing popularity as an employee benefit, however, there is little causal evidence around individual demand for these accounts. This paper seeks to address this gap in the literature, reporting on a randomized controlled field experiment conducted with over 11,000U. S federal employees in 2017 in order to evaluate the effectiveness of targeted messages designed to increase FSA contributions. Our results suggest that the provision of basic information about FSAs delivered via an emailed employee newsletter did not affect the likelihood of contribution or the contribution level. The addition of statements about the absolute returns or relative returns offered by the accounts similarly had no significant effects, and these null effects are observed despite relatively high email open rates. We discuss explanations for the null results and the policy implications of findings from what appears to be the first health economics experiment analyzing tax incentives around health care savings.

Understanding Effects of Flexible Spending Accounts on People with Disabilities: The Case of a Consumer-Directed Care Program.

This study set out to explore the saving behavior, barriers, and facilitators along with effects of participating in a consumer-directed care program among people with disabilities in the state of West Virginia (N = 29). Results suggest that respondents were able to save money through the program to enable them to purchase goods and services they needed to enhance their welfare and quality of life. Generally, items saved for fell into 3 broad categories: household equipment, individual functioning, and home modification. Facilitators and barriers to saving were also indicated and so were the benefits of program participation. Program and policy implications are presented.

FUZZY MULTIATTRIBUTE CONSUMER CHOICE AMONG HEALTH INSURANCE OPTIONS

People buy insurance to protect themselves against possible financial loss in the future. Health insurance provides protection against the possibility of financial loss due to health care use. A selection among health insurance options is a multiattribute decision making problem including many conflicting criteria. This problem can be better solved using the fuzzy set theory since human decision making is generally based on vague and linguistic data. We propose an integrated methodology composed of fuzzy AHP and fuzzy TOPSIS to select the best health insurance option. The considered option types, Health Savings Account (HSA), Flexible Spending Accounts (FSA), and Health Reimbursement Arrangement (HRA) are evaluated using eight different criteria under fuzziness. A sensitivity analysis is also realized.

Flexible spending accounts and the use-it-or-lose-it provision

Flexible spending accounts (FSAs) are a widely used arrangement that allow employees to pay for qualified out-of-pocket health expenses with pre-tax dollars. The original structure of FSAs included a significant forfeiture risk if households had unused funds in their accounts at the end of the year. In 2005, the US Treasury made an administrative ruling that offered a grace period for spending FSA funds after the end of the calendar year, thereby substantially reducing forfeiture risk. We use a unique panel data set to evaluate the effects of this rule change.We find that the change increased FSA participation rates by about 4 percentage points (17% increase from a 23.9% baseline). We also find that FSA election amounts increased by just over 3%, though this result is more fragile.

The Distributional Effects of Health Reform Limits on Flexible Spending Accounts.

Flexible spending accounts (FSAs) are a widely used arrangement that allow employees to pay for qualified out-of-pocket health expenses with pre-tax dollars. The tax preference given to FSAs has been controversial and recent health care law (Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act) limits the tax exclusion to an inflation-adjusted value of $2,500 (2013 $s). The limit is estimated to increase federal payroll and income tax receipts by $13 billion between 2013 and 2019. But the welfare implications of this change are unclear.This paper uses a unique panel dataset to explore the demographic profile of households likely to be affected by the tax increase. We use a sample of 19,322 households observed over the period 1998-2008. The data include FSA expenditures, insurance claim information for covered medical and dental expenditures, and household demographic information. We explore patterns of FSA usage by income and health status.We find that households likely to be affected by the tax increase disproportionately tend to be households experiencing one or more chronic health conditions. The existence of chronic illness is associated with relatively high and persistent medical expenses and also with relatively older and wealthier households. We estimate an average tax increase of $101 in 2013 for 13.9 million households with an FSA.

Health Insurance Choice with Flexible Spending Accounts

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.

Optimum Allocations to Health Care Flexible Spending Accounts

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 absolutely continuously random variable. This assumption, however, ignores the fact that some employees 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 outof-pocket health care expenses.

Talking About Incontinence

Talking About Incontinence

Flexible Spending Accounts and Adverse Selection

I model the interaction of flexible spending accounts (FSAs) and conventional insurance in a simple discrete loss setting with asymmetric information. I show that FSA availability can break a separating equilibrium, even when one would otherwise exist, because high-risk types might prefer the lower-coverage contract supplemented with FSA funds. In this case there may exist a Pareto-inferior separating equilibrium. It is also shown that FSA availability alters the optimal pooling contract. Employers can reduce coverage levels, raising expected utility for low-risk types, and can compensate high-risk types by offering supplemental FSA coverage. Thus, it is possible that FSAs strengthen pooling contracts.

Employee Choice of Flexible Spending Account Participation and Health Plan

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 through the use of a unique dataset that provides three years of employee-level matched benefits data. Motivated by the theoretical model of FSA choice presented in Cardon and Showalter (2001), 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 use of the FSA program.

Employee choice of flexible spending account participation and health plan

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.

Consumer Directed Health Care

Consumer driven health care (CDHC) is a potential solution to two perplexing problems: (1) How to choose between health care and other uses of money, and (2) how to allocate resources in an industry where normal market forces have been systemically suppressed. In the consumer-driven model, consumers occupy the primary decision-making role regarding the health care that they receive. From an employee benefits perspective, consumer driven health care in the broadest sense may refer to limited employer contribution or dual option plans featuring high deductible health coverage with tax advantaged savings vehicles such as Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs) (Daly, 2005). However, before we consider the solution, we must first investigate why a solution is needed in the first place.

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

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 firm-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%. Meanwhile, coinsurance rates net of the subsidy are approximately unchanged, providing evidence that FSAs are only welfare neutral if we ignore distributional considerations and the deadweight loss of the taxes necessary to finance the subsidy. These results also suggest that FSAs may explain a significant fraction of the shift in health care costs to employees that has occurred in recent years.

Consumer-directed health care and case management: Part 2

Previously, we reviewed the three basic plan designs in consumer-directed health care (CDH): • Health savings accounts (HSAs): Consumer-owned bank accounts that provide tax benefits on funds contributed by individuals and/or employers. Once contributed, the money in this account is owned by the consumer and is fully portable, with no rollover caps from year to year on unused funds. These accounts may cover prevention for each enrolled member. • Health reimbursement arrangements (HRAs): employer funds made available to cover an employee's qualified expenses through a carrier. HRAs allow 100% prevention coverage to each enrolled member and permit money to be rolled over from year to year, with rollover caps as desired by the employer and health plan. HRAs are not portable, but the law does permit access to the funds beyond employment, as long as the funds reside with the employer. • Flexible spending accounts (FSAs): funds deducted tax-free from employee salaries to cover specific expenses. These are “use it or lose it funds” that expire at the end of the year.

Employee Cost-Sharing and the Welfare Effects of Flexible Spending Accounts

In recent years, employees have been shouldering an increasing share of the costs of employee-provided health care. At the same time, more and more employers have been allowing employees to pay their out-of-pocket health care costs using pre-tax earnings, through tax-subsidized flexible spending accounts (FSAs). We use a cross-section of firm-level data from 1993 to show empirically that these FSAs can explain a significant fraction of the shift in health care costs to employees, and that this shift may be efficient, given the distortionary effects of the existing tax-subsidy to premiums. Correcting for selection effects, we find that FSAs are associated with insurance contracts with coinsurance rates that are 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.

Flexible Spending Accounts: Reducing the Regulatory Burden

With flexible spending accounts, better known as FSAs, families can save up to 30% of the cost of their out-of-pocket medical expenses. With the exception of the new and untested health savings accounts enacted as part of the Medicare prescription drug law, FSAs are the only way workers can leverage the U.S. tax code to support their out-of-pocket expenses. However, even after 20 years, fewer than 20% of the estimated 25 million U.S. workers eligible for FSAs elect to participate. FSAs remain unappreciated and overlooked. This article discusses the FSA “use it or lose it” rule, which causes most employees to view FSAs as a gamble. This forfeiture rule prevents FSAs from winning more widespread employee interest because this regulatory obstacle requires employees to forfeit any FSA funds that remain in their account at year-end. Once this rule is modified, FSAs will become the center of employer-based U.S. health care policy.

Flexible Spending Accounts: New IRS Ruling

Last September, the IRS announced that consumers can pay for over-the-counter (OTC) drugs with pretax dollars through health care flexible spending accounts (FSAs) provided by employers' benefit programs. Typically, FSAs provide only for prescription drugs and medical expenses not covered by insurance. As more prescription drugs are moving to OTC status, which is costlier than the prescription copay premium, the ruling comes as a salvation for chronic sufferers of heartburn and allergies, among other aliments. Additionally, it is a bright spot for employers who offer FSAs but have decreased supplementary benefits because of rising costs, but need to retain valued employees.

Health Care Flexible Spending Accounts: An Old Benefit With New Appeal

Health care flexible spending accounts (HCFSAs) were introduced in the late 1970s, when pretax contributions were first allowed under section 125 of the Internal Revenue Code. However, these benefits have been treated as a "minor league player" in a world of "major league" health plans. But with recent legislative changes and skyrocketing health care costs, HCFSAs are well positioned to become a more valuable health care benefit. To ensure that plan sponsors and employees realize the tremendous advantages that these accounts offer, plan sponsors need to put more muscle behind the promotion of HCFSAs. To be effective, employees will need a greater understanding of how these accounts will benefit them and the role HCFSAs can play in their overall health care planning processes. By encouraging participation in HCFSAs, employers can attain financial gain for themselves and their workforces and compensate for some of the rise in health care expenses. In addition, HCFSAs can help further the cause of health care cost education and bring focus to the need for more awareness and consumerism.

Flexible Spending Accounts as Insurance

AbstractWe model flexible spending accounts (FSAs) as a special type of insurance policy. We prove the following results given losses drawn from a continuous distribution: (1) the optimal election amount, F*, is increasing in the consumer's level of risk aversion; (2) F* is increasing in the level of the maximum loss; If utility is decreasing in absolute risk aversion (DARA), then F* is (3) decreasing in income and (4) increasing in the marginal tax rate.

Optimal contributions to flexible spending accounts

Flexible spending accounts (FSAs) permit tax-free healthcare spending. FSA dollars at year-end are lost. Given no alternative for leftover money, rational consumers spend to zero. Optimal FSA contributions should emphasize tradeoffs between utility from pre-tax medical expenditures and post-tax non-medical consumption.