Making Flexible Spending Accounts Better

This is from my post at the Health Affairs Blog. More on this next week.

There is something rather simple the Obama administration could do that would have a very large impact on health care spending. Apparently, this is something that can be done administratively, without Congressional action. The simple step: Allow deposits to Flexible Spending Accounts  (FSAs) to roll over at year end and grow tax-free.

Currently, there are about 25 million people with an HSA or HRA account (roughly evenly split) and another 35 million people with FSAs. That means that over half the people with a health account have an incentive to spend rather than to save. If FSAs could roll over and become use-it-or-save-it accounts:

• There would be a huge immediate impact on the incentives of the 35 million current account holders; instead of end-of-year wasteful spending, they would be tempted to save for more valuable future health care spending.
• Employers across the country would consider integrating these accounts into their health plans, making employer contributions to them and experimenting with new health plan designs.

Moreover, employers and their employees would have a vehicle much better than any option currently available to them to control health care spending:

• FSAs could be combined with high deductibles, allowing employees to directly control, say, the first $2,500 of spending without all of the pointless restrictions that hamper the usefulness of HSAs.
• FSAs could be created to allow employees control of whole areas of spending, say, all preventive care and all diagnostic tests — services for which individual discretion is both possible and desirable.
• FSAs could be created for the chronically ill  — allowing, say, diabetics or asthmatics to manage their own health care dollars, much as home-bound, disabled Medicaid patients manage their own budgets in the Cash and Counseling programs.
• FSAs could be combined with value-based purchasing insurance plans — where the insurer only pays, say, for certain drugs, doctors and hospitals, but allows patients to add money out-of-pocket and make other choices — thus allowing the development of a real market for more expensive health care services.

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