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

Georgetown Economics Working Paper No. 05-12

32 Pages Posted: 6 May 2005  

William Jack

World Bank

Arik Levinson

Georgetown University - Department of Economics; National Bureau of Economic Research (NBER)

Sjamsu Rahardja

Georgetown University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2, 2005

Abstract

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.

Keywords: Health expenditure subsidies, moral hazard, Flexible Spending Accounts

JEL Classification: D60, H21, I18

Suggested Citation

Jack, William and Levinson, Arik and Rahardja, Sjamsu, Employee Cost-Sharing and the Welfare Effects of Flexible Spending Accounts (May 2, 2005). Georgetown Economics Working Paper No. 05-12. Available at SSRN: https://ssrn.com/abstract=716081 or http://dx.doi.org/10.2139/ssrn.716081

William G. Jack (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Arik M. Levinson

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-5571 (Phone)
202-687-6102 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sjamsu Rahardja

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

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