NCPA - National Center for Policy Analysis

Flexible Spending Accounts: The Case for Reform

May 13, 2003

Congress can help control health care costs, reduce the number of uninsured and promote quality medical care by making an existing health benefit -- Flexible Spending Accounts (FSAs) -- more flexible, portable and widely available. Doing so would give millions of Americans more control over their medical care and make them more cost-conscious patients.

Federal law allows employers to create FSAs for their employees. FSAs have the following characteristics:

  • Once a year, employees choose how much pretax income will be deducted from their paychecks and deposited into their FSA (employers also may contribute to FSAs, although few do).
  • Throughout the year, those funds can be spent on medical care at the employee's discretion.
  • Workers can choose their own doctors and are subject to no managed care controls. At the end of the year, however, they lose any unused funds.
  • This use-it-or-lose-it provision guarantees wasteful end-of-year spending on unnecessary medical items.

If FSAs were portable and governed by a use-it-or-save-it rule, they could become a powerful force for improving our health care system.

According to the Employers Council on Flexible Compensation, more than 20 million Americans have access to an FSA, though only about 6 million opt for one. In addition, millions of federal employees will be able to open an FSA for the first time this year. This dwarfs both the MSA pilot program, which at last count had sold only about 100,000 policies, as well as the 400,000 HRAs known to exist.

Source: Michael F. Cannon, "Flexible Spending Accounts: The Case for Reform," Brief Analysis No. 439, May 13, 2003.

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