Individual choice in spending accounts. Can we rely on employees to choose well?

Flexible spending accounts (FSA) represent a current health care financing tool that may become an important component of incremental health care reform. Because FSAs require employees to make financial contributions based on anticipated health care needs, contribution decisions are likely to be subject to many of the errors made in other insurance decisions. The authors analyzed the benefits selections, benefits forms completion, and FSA contribution levels of approximately 9,500 employees of the University of Pennsylvania from 1987 to 1992. Default and repeat choice trends characterize the completion of benefits forms and the reselection of health insurance options by employees. Despite the economic benefits of contributing to an FSA, only 14% of employees contributed in any one year and 73% never made a contribution. Multivariate models of these contributions fail to demonstrate the importance of what ought to be relevant influences in contribution decisions (for example, age, income, family status, or underlying health insurance). Whereas most FSA decisions are characterized by default contributions of $0, employees who contribute in one year are most likely to contribute exactly the same amount the next year, even when other circumstances change. The pervasiveness of these patterns raises concerns that health care reform plans that rely on financial incentives at the consumer level--for example, proposed medical saving accounts--will be inefficient.