Employee cost-sharing and the welfare e¤ects 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 ‡exible spending accounts (FSAs). We use a cross-section of …rm-level data from 1993 to show empirically that these FSAs can explain a signi…cant fraction of the shift in health care costs to employees, and that this shift is e¢ cient, given the distortionary e¤ects of the existing tax-subsidy to premiums. Correcting for selection e¤ects, we …nd 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. In addition, coinsurance rates net of the subsidy, are themselves higher by about 2 percentage points, providing evidence that FSAs are welfare-