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

37 Pages Posted: 25 May 2006 Last revised: 17 Jan 2010

See all articles by William Jack

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 2005

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.

Suggested Citation

Jack, William G. and Levinson, Arik M. and Rahardja, Sjamsu, Employee Cost-Sharing and the Welfare Effects of Flexible Spending Accounts (May 2005). NBER Working Paper No. w11315. Available at SSRN: https://ssrn.com/abstract=720404

William G. Jack

World Bank ( email )

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

Arik M. Levinson (Contact Author)

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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