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Flexible Spending Accounts and Adverse Selection

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  • James H. Cardon

Abstract

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.

Suggested Citation

  • James H. Cardon, 2010. "Flexible Spending Accounts and Adverse Selection," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(1), pages 145-153, March.
    • Handle: RePEc:bla:jrinsu:v:77:y:2010:i:1:p:145-153
    DOI: 10.1111/j.1539-6975.2009.01341.x
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    References listed on IDEAS

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    1. Barton H. Hamilton & James Marton, 2008. "Employee choice of flexible spending account participation and health plan," Health Economics, John Wiley & Sons, Ltd., vol. 17(7), pages 793-813, July.
    2. Cardon, James H. & Showalter, Mark H., 2007. "Insurance choice and tax-preferred health savings accounts," Journal of Health Economics, Elsevier, vol. 26(2), pages 373-399, March.
    3. James H. Cardon & Mark H. Showalter, 2003. "Flexible Spending Accounts as Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(1), pages 43-51, March.
    4. Cardon, James H. & Showalter, Mark H., 2001. "An examination of flexible spending accounts," Journal of Health Economics, Elsevier, vol. 20(6), pages 935-954, November.
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    1. Cardon James H. & Moore Joel & Showalter Mark H., 2012. "The Distributional Effects of Health Reform Limits on Flexible Spending Accounts," Forum for Health Economics & Policy, De Gruyter, vol. 15(1), pages 1-24, November.
    2. Richard Peter & Sebastian Soika & Petra Steinorth, 2016. "Health Insurance, Health Savings Accounts and Healthcare Utilization," Health Economics, John Wiley & Sons, Ltd., vol. 25(3), pages 357-371, March.

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