Image: Jim Cooke (GMG)

It was a pretty small amount of money Sharon Davis lost, which is typical. Davis is a professor of sociology at the University of La Verne in California, and as with many American workers who go to an office and sit at a desk as a member of the professional class, her employer-sponsored benefits included the chance to stash money for future medical expenses, free of tax. Like many employees who are offered a medical spending account by their company, Davis elected to set aside a negligible portion of her paycheck—something like $12 every two weeks—to pay for doctors’ visits during the year.

Perhaps, if you work at a large company, you’ve been handed a stack of flyers featuring radiantly healthy families at the beginning of the year, offering a similar account. And perhaps, like Davis, you’ve lost the cash you stashed away, and don’t know exactly why or where it went.

Since the 1970s, the government has offered these tax-free accounts as an attempt to offset the rising cost of healthcare and to mollify bosses discomfited by how much it costs to keep their employees alive and healthy every year. They appeal to financially sensible planners as an attractive way to get a good deal: Medical expenses are an exorbitant inevitability, so a tax shelter for the dollars you’ll spend anyway makes perfect sense. If you’re a chronically sick person and you know exactly how much medication you’ll need, or just want to buy sunscreen without contributing to the defense budget, these benefits are attractive, assuming you can get back your hard-earned cash.

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There are two types of tax-free accounts offered by employers for medical expenses: a flexible spending account (FSA) with funds that will disappear at the end of the year if you don’t use them, and a health savings account (HSA) in which the funds don’t expire and can be taken with you when you go to a new job. An employee can put up to $2,700 into a flexible spending account, and though it will be deducted in dribbles from their paycheck throughout the year, the entire amount is available for immediate use. Funds in an FSA are generally “use it or lose it,” though the government has allowed grace periods or set roll-over amounts since 2012. But as with most rules that apply to these accounts, the specific policies are at an individual employer’s discretion. Forfeiture rules, combined with the complicated mechanics of actually claiming money through a third-party firm like PayFlex, lost Sharon Davis a couple of hundred dollars from her FSA towards the end of last year.

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Like forcing hospitals to make public the unintelligible cost of each individual procedure, these accounts are supposed to incentivize people with medical needs to feel as if they’re in control, stay conscious of their budgets, and to comparison shop. This particular ideology, favored by politicians who offer open-market solutions to rising healthcare costs, requires a few implicit concessions, the first of which is the idea that “empowered” “consumers” are best positioned to navigate a $3.5 trillion industry practically designed to be incomprehensible. Framing healthcare as a durable good, it insists the only way to inspire a sense of responsibility for the cost of care is to separate working people from a larger share of their wages. And while all those newly empowered consumers stash money away to pay for the privilege of shopping around for better care, an additional layer of industry has grown around facilitating their spending. There’s a lot of money to be made, it turns out, in the business of helping people help themselves.

Over the last decade, that industry has expanded exponentially: HSAs, introduced in the early 2000s, have become more popular than flexible spending accounts. They, too, offer some surprises that aren’t featured in the glossy brochures handed out during open enrollment, such as maintenance charges and fees for excess contributions. While people can open one at most any bank, or take their money with them if they leave their employer, the cash they’re saving for medical needs may be slowly whittled down by monthly fees from the firm managing the account.

A $9 monthly maintenance fee or $100 in forfeited funds are small, bitter losses on an individual level, but somewhat more ominous when assessed as a whole. One of the few programs the government offers to save Americans money on private health care could ultimately be leaking hundreds of millions of dollars back to their employers, or, in a roundabout way, to the third-party companies paid to approve or deny employee claims.

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It’s nearly impossible to say exactly how much money is being lost. Tax codes are boring, no one is losing their life savings, and flexible spending accounts have been a fixture for so long that no one appears to be keeping track of them in much detail nationwide. In trying to figure out how much money is forfeited every year, I was told that the idea of the mass loss of wages was overstated, but I also couldn’t get a reliable ballpark number, even from the government agency whose rules ostensibly determine who gets their money back.

For the people who routinely deal in tax law and human resources claims, this is a common sense benefit, and I was treated with something close to exasperation when I asked why these accounts work the way they do. I was also given very different answers about what happens to forfeited funds by compliance experts and the businesses that administer the accounts. When it works, the program is an obscure way for (mostly) white collar workers with a high tolerance for paperwork to get a sweet perk. When it doesn’t, it can look like a system that trades on medical anxiety to reroute a portion of earned wages, sustaining the businesses that offer it in something of a closed loop.

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Technically, as one tax lawyer pointed out to me, an employer could just pool the money and split it among employees if it isn’t used, which is what appears to have happened commonly when these accounts first appeared. Now, though, anecdotal evidence suggests companies aren’t handing wages back to employees at all. “For the most part, what little is left is used to reduce and offset administrative costs associated with offering the FSA plan,” says John Hickman, a health plan compliance expert with Alston & Bird. In other words, the money is used to fund other employee’s health benefits, or earmarked to pay the third-party companies that administer the accounts. But even the IRS couldn’t tell me, after two weeks of back and forth, how much is saved, spent, or lost in these tax-free accounts.

Davis’ employer didn’t respond to questions about their FSA program. PayFlex tells me that under no circumstances are they paid out of forfeited funds. When I followed up a few times asking asking for clarity on that policy, and how they keep tabs on how an employer is doing that accounting, they did not respond.

“I’m dealing with these things on a very theoretical level,” said one compliance lawyer I spoke to. “I don’t see the actual on-the-ground operation. On paper, it’s not a terrible system. That doesn’t mean that in practice it isn’t.”

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The company Davis’ employer paid to manage her flexible spending account, PayFlex, is owned by Aetna, one of the largest health insurers in the country. Its basic function, as far as Davis’ account went, was to make sure she was using her tax-free dollars for medical expenses accepted by the IRS. To do this, PayFlex requires a detailed receipt—an issue, if you have a bill printed by a doctor that doesn’t conform to the particular criteria—as well as proof that the expense wasn’t covered by insurance. Al, a 60-year-old with severe arthritis in North Carolina, told me he’d simply stopped trying to file claims. He recently sent me a long email from the hospital, where he was recovering from surgery. He was tired of digging through bills, matching them to a medical code, and waiting on hold with the various companies involved in the process, just to have all his claims denied.

Davis’ experience with PayFlex, like Al’s, was something between a miscommunication and an obtuse customer service experience. The first time she submitted receipts, she says, she didn’t hear back for six weeks. Upon calling the company, she found her claim had been denied for failing to provide the correct information, and she re-visited her doctor for more detailed documentation. When the second claim was denied, she says she was told her receipts lumped together two procedures—one covered, one ineligible. The third consecutive claim was denied, too: The deadline to file for reimbursement had passed.

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The $200 Davis earned for teaching and then lost to the bureaucratic hassle of reimbursement wasn’t technically a wage: As the Ohio Supreme Court ruled in 2013, money set aside in accounts like these can’t count toward earnings as far as unemployment is concerned. According to what I was told by corporate compliance experts, Davis’ money went back to her employer, who either held onto it or used it to offset the costs associated with providing the accounts.

Consumer complaint boards are full of stories like these, told by people who stash their money in good faith and are then baffled by the hurdles imposed by third-party administrators and the IRS. But the amounts lost are too small to take to proper court, and at least one large third-party administrator requires that disputes must be privately arbitrated. (The same contract bars users from bringing a class action suit.) And these $100-odd leaks in the system are usually money saved by relatively well-compensated workers who are less likely to miss it, or complain.

Employers love flexible spending accounts. They’re basically a free benefit from the boss’s side of things. Suzanne Goulden, a benefits manager at the Society for Human Resource Management, says most companies will start thinking about contracting a third-party administrator like PayFlex to manage the program once they hit 50 employees. “Most companies want to offer flexible spending accounts,” she says. “It’s a very popular benefit.”

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Mercer’s annual employment survey estimates that people at large companies who have flexible spending accounts and forfeit funds lose as average of $67 a year. They tell me that in 2018, they stopped including numbers for flexible spending accounts, because there’s been little change in the numbers over time. An analysis of data provided by Wageworks, another third-party administrator of these programs, indicates the amount of wages forfeited in these programs may be well over $522 million a year.


Flexible spending arrangements are the most counter-intuitive of the services offered by companies specializing in “consumer-directed benefits,” an industry based on getting Americans to take more responsibility for managing health care costs. But they’re certainly not the only fringe benefit offered by a growing number of third-party firms that offer perks and incentives to offset the high cost of being alive and employed in America. As the tagline for one company reads, the goal is to “empower consumers to manage their ever-growing responsibility towards the cost of their health care.” As a result of that “empowerment,” American health consumers are being forced to interact with more third-party companies who guard access to care.

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People given more “individual choice” in their health care find they have to navigate the medical system’s infinite acronyms and billing codes. Consumer-directed benefits add another layer of divining to this process; when the system doesn’t work, patients are stranded between billing officers, insurance companies, benefits managers, and banks.

Consumer-directed benefits are more than medical savings accounts; they also include flexible spending accounts for public transit and dependent care. Betting on this emerging industry, health insurers have scooped up some of the largest of the companies managing these benefits over the last few years.

As Aetna wrote in its 2018 annual report, “we believe the role of the consumer in health care is changing and that consumers will become the primary decision makers when it comes to choosing their health-related benefits.” It’s owned PayFlex since 2011, which was a good bet: Health savings accounts have boomed over the last decade. Introduced by George W. Bush in 2003 and favored by the Trump administration, they are by law coupled with high-deductible insurance plans. Matthew Rae, a policy analyst with the Kaiser Family Foundation, told me that these types of accounts, once “a fringe element of the market,” have grown so quickly in the last decade that now one-fifth of American workers has one. “More workers are in an HSA than an HMO,” he says.

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Health savings accounts are, in many ways, more useful to the average person that the flexible spending accounts that expire, but in order to be eligible for most HSAs, you have to have a high-deductible health plan. And it’s absolutely true that arrangements like these have placed more of the cost of medical care on employees over time, says Rae.

Theoretically, you could pay an insurance company a share of the premium for a high-deductible plan while your employer pays a separate fee to that insurer’s subsidiary to deal with the money you’re saving. If you, like some of the people I interviewed, fail to navigate the chain of claims to have your money used appropriately, you might indirectly pay your company a portion of your paycheck, and they might give it back to the insurance company in the form of service fees.

The trade-offs for tax advantage can be steep for the financially unsavvy, precarious, or the simply unlucky. The IRS will take one-fifth of the funds if you take money out of a health savings account for any non-medical necessity before you’re 65.

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Acting as a liaison between employees, employers, and the IRS is big business. The health insurance and finance industries, which tend to trade executives among top firms, are cozy in this segment of the market: Flexible spending accounts are often tied to branded credit cards, and many executives at third party administrators come to the health savings market from companies like American Express and MasterCard. In 2015, United Healthcare acquired its own bank, Optum Bank, to administer medical savings accounts and other consumer directed benefits. Now, according to its SEC filing, it holds 5.2 million accounts, and processed $160 billion in payments to medical companies last year. The company, which also operates a pharmacy benefits manager, made more than $100 billion a year as of 2018.

Firms like these make their money in a couple of ways. For a flexible spending account, according to a benefits manager at the Society for Human Resource Management, an employer might pay a yearly premium of something like $400, plus between $12 and $30 per employee every month. Some earn investment income on the funds they manage, as well as charging monthly maintenance fee on held health savings accounts.

Last year, right before it was investigated for defrauding investors, WageWorks, one of the few large consumer-directed benefits companies that isn’t owned by a health insurer, won a contract to provide flexible spending accounts to the U.S. government’s Office of Personnel Management. In a press release, the company said 1.8 million employees would be eligible for the service. The potential contract award for the service of managing employee’s money and looking over their receipts was close to $58 million over five years.

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More than a decade ago, this system was being prodded: In the Journal of Public Economics, a group of researchers argued that not only were flexible spending accounts not making an impact on public health, they were actively making it worse, considering the “deadweight loss of taxes” that would have otherwise funded public services and the loss of incentive to provide comprehensive insurance. And as health savings accounts have become more popular, the number of Americans with high-deductible plans has risen in parallel. Whatever self-directed budgeting the system rewards, it’s only cobbled together to relieve—or complement—an arrangement in which Americans are shouldering a larger portion of the cost of their care.

Which isn’t to mention that the flexible spending account’s individual cap of $2,700, even tax-free, likely wouldn’t be enough to cover something truly disastrous. Walking through an emergency room’s doors can cost thousands of dollars in some parts of America. These accounts aren’t for a medical emergency, or an unexpected bill: They’re best suited for the small comforts and treatments that might feel like a bonus, or a deal. News outlets run stories every year recommending services for people who need to use their FSA dollars fast. Acupuncture and therapy usually make the list.

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Coupling the high premiums of the modern health care system with savings plans makes sense if you accept the logic that rising costs are inevitable. But accounts like these, when they’re offered to the selected few with employer-sponsored benefits, are increasingly buried in another level of bureaucracy, and they appear to be leaking millions of dollars every year.

Sure, $522 million is nothing compared to the estimated $765 billion the American health care system wastes collectively, throwing out medications or prescribing unnecessary treatment. But it’s a bizarre and telling facet of the larger issue, promising a discount and making the process so excessively complex that the people who use it often appear to simply give up. Instead of abandoning a program that offers dubious reward for people who need care, the market has rewarded ever more frustrating iterations, placing responsibility for its oversight on a network of firms, who in turn promise self-determination and killer deals. The IRS doesn’t track what happens to the money, and most of the decisions about these accounts are being made by your employer. It’s unlikely, if you forfeited part of your flexible spending account, that you have any idea where it went.

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The human resources department at my own company wouldn’t answer any of my calls about the accounts. The best check on the system, I’m told, is an individual audit from the IRS.

A previous version of this story incorrectly stated Optum’s revenue, and has been corrected to reflect that the company reported making $100 billion annually rather than quarterly.