The Incidental Entitlement

The Incidental Entitlement


There are two year-end spending binges in America. One is good for the economy and the other isn’t. One gets a tax break and the other generates tax revenue. And -- no surprise here -- the binge that benefits from Uncle Sam’s generosity isn’t the one that’s economically efficacious.

The good binge is our annual orgy of gift giving during the last quarter of the year. Retailers rely on the holiday season to make their whole year. If consumers tighten their belts too much, they cut jobs, close stores and depress the stock market.

But the nation’s year-end spending spree on Band-Aids, over-the-counter medicines, LASIK surgery, whole body scans and other products and services is another failed example of Uncle Sam’s generosity. Flexible health spending accounts (FSAs), which allow individuals to use up to $5,000 in pre-tax income, must be spent by March 15th of the succeeding year or the money is returned to one’s employer. It’s use it or lose it, even if you don’t need it.

That describes much of what Shenandoah University pharmaco-genomics professor Arthur Harralson bought last year with the $3,000 from his six-figure salary that he put into an FSA. “My health insurance isn’t very good so we use the flexible account for out-of-pocket expenses,” he said. “And then there’s my daughter’s orthodontia. Instead of $4,000, the tax break reduces my out-of-pocket costs to $3,200 a year.”

Virtually all employers – 99 percent, according to Hewitt Associates -- offer their workers the opportunity to put before-tax money into an FSA. Yet just one in five employees took advantage of the program in 2010. The average amount set aside was $1,441.

Since no one measures exactly what is purchased with these accounts, it’s hard to estimate how much is waste. But based on news organizations’ consumer “tips” or come-ons from online pharmacies, it’s probably a fair conclusion that at least some portion isn’t worthy of taxpayer largesse.

“The stories are legion of how the money is wasted,” said Paul Van de Water, a health care policy analyst at the Center for Budget and Policy Priorities, a liberal think tank in the nation’s capital that favors scaling back the FSA incentive. “It covers a lot of marginal stuff.”

That’s why Congress and the Obama administration moved to limit the annual FSA contribution in their health care reform legislation, which will be voted on this weekend. But like so much else in the bill, instead of eliminating the tax break entirely, they wrote a half-measure. They set a $2,500 maximum contribution and indexed it for inflation. That limited the revenue raised from a tax break that cost the Treasury $1.8 billion in 2008 to just $13 billion over the next decade, according to Van de Water.

If the reformers were intent on keeping this tax break in the law, they could have made it a lot fairer by offering it to everyone -- not just the 20 percent of employees who can afford to set aside money from their paycheck into an FSA. How that could be done without blowing a huge new hole in the federal budget? Simple. It could be limited to the first few hundred dollars of co-pays and deductibles on otherwise insured medical costs. Moreover, by allowing people to deduct this small amount from top line income at tax time, it would eliminate all the ridiculous and expensive paperwork required to reclaim one’s own money from an FSA.

The bottom line is that it makes no sense for the cash-strapped U.S. Treasury to subsidize household’s incidental health expenditures.

Merrill Goozner is the author of The $800 Million Pill: The Truth behind the Cost of New Drugs.