Medical expenditures and the measurement of poverty in the United States

Abstract

Using data from the Medical Expenditure Panel Survey (MEPS) we estimate the fraction of the US population that is health poor. A person is health poor if their income prior to paying health insurance premiums and out-of-pocket healthcare costs is above the poverty line, but their income net-of-premiums and out-of-pocket healthcare costs is below the poverty line. Because resources used to finance health insurance premiums and out-of-pocket costs are (A) lexicographically preferred and (B) cannot be used to maintain an individual’s standard of living, they should be excluded from official poverty estimates. Approximately 1% to 2% of the US population is health poor. Elderly individuals, individuals in ill health, and low-income individuals are more likely to be health poor than other groups. We use our estimates of the health poor to evaluate alternative healthcare reform policies. The Affordable Care Act reduced the proportion of individuals near-poverty that are health poor from 23% to 18% and reduced the proportion of all individuals that are health poor from 1.5% to 1.1%. In contrast, counterfactual simulations of a Medicare for All plan similar to Saez and Zucman’s (2019b) suggest that Medicare for All would all but eliminate health poverty.

Keywords:

• Poverty
• healthcare
• health insurance
• Medicare for All
• Affordable Care Act

JEL CODES:

• I14
• I18
• I32

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 To take one example, Starr (2017) notes that—despite what neoclassical economic theory might suggest—concentration in insurance markets has not resulted in increased savings to consumers. Starr (2017) writes: “[W]hen dominant insurers have monopoly-busting power, a review of the evidence concludes, they do not pass along savings to buyers of health insurance” (p.478).

2 Sen (1983, 1987) credits Smith (1776) with defining poverty as the inability to appear in public without shame. In an oft-quoted passage on what goods should be considered the “necessaries” of life, Smith (1776) writes:

By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but what ever the custom of the country renders it indecent for creditable people, even the lowest order, to be without. … Custom… has rendered leather shoes a necessary of life in England. The poorest creditable person of either sex would be ashamed to appear in public without them. (860–870)

3 Importantly, the Supplemental Poverty Measure does deduct medical out of pocket expenses (but not health insurance premiums) from its resource measure.

4 Spash (2000) notes the hierarchical theory of choice in Post Keynesian economics corresponds to the general case in the theory of consumer choice, insofar as the gross substitution axiom of neoclassical theory is a special case of hierarchical preference ordering in which all goods are traded-off against each other.

5 One can imagine a category of environment poor individuals analogous to the debt poor discussed by Pressman and Scott (2009a) or the health poor examined in this paper. The difficulty in estimating the size of this group lies in the fact that unlike interest payments or healthcare services, environmental quality is generally unpriced.

6 Pressman (2023) similarly argues that a Post Keynesian approach to health and health policy should emphasize: (1) Uncertainty rather than risk, (2) Income effects rather than substitution effects, (3) Historical time rather than equilibrium, (4) Imperfect competition.

7 E.g., Dunn (2006) writes: “[I]t follows that Post Keynesians would be keen to secure universal access to a basic set of health services. What is more, the identification of inalienable basic needs and rights would lead Post.

Keynesians to advocate some external valuation of the minimum basic health benefits package that all members of society would have access to” (p. 279).

8 For the Full Year Consolidated Files, we obtain the data from the IPUMS-MEPS database (Blewett et al., 2021).

9 Importantly, MEPS appears to understate out-of-pocket spending on healthcare services relative to other data sources. E.g., OECD data suggests that average out-of-pocket spending in the United States in 2019 was approximately $1,224, compared to a value of $829 in MEPS. This difference is possibly because MEPS excludes spending on over-the-counter drugs, which consumers spend approximately $400 on annually (CHPA, 2019). Thus, our estimates constitute a lower bound for both the level of out-of-pocket expenditure and the share of individuals who are health poor.

10 https://aspe.hhs.gov/topics/poverty-economic-mobility/poverty-guideline.

11 Total family income includes—for all members of a family—annual earnings from wages, salaries, bonuses, tips, commissions; business and farm games and losses; unemployment and workers’ compensation; interest and dividends; alimony, child support, and other private cash transfers; private pensions, IRA withdrawals, social security, and veterans payments; supplemental security income and cash welfare payments from public assistance, Temporary Assistance for Needy Families, and related programs; gains or losses from estates, trusts, partnerships, S-corporations, rent, and royalties; and a small amount of “other” income.

12 E.g., even individuals with high quality private health insurance plans offering extensive coverage may end up facing exorbitant out-of-pocket costs if they receive emergency care from an out-of-network physician (even if care is received at an in-network hospital!). Cooper, Morton, and Shekita (2020) provide evidence that this practice increases healthcare prices and emergency medicine physician incomes at the expense of the patient.

13 A more formal assessment of the parallel trends assumption required for difference-in-differences is presented in Appendix A.2.

Additional information

Notes on contributors

Luke Petach

Luke Petach is an assistant professor of Economics, Jack C. Massey College of Business, Belmont University.

David K. Wyant

David K. Wyant is an assistant professor of Management, Thomas F. Frist, Jr. College of Medicine. Jack C. Massey College of Business, Belmont University.