5
Medical Expenses

The current official poverty measure does not directly take into account people’s medical expenses. It perhaps indirectly takes them into account in that the thresholds were originally devised by multiplying food costs by three to account for other needs, which could be said to include medical costs, among other things. Even if so, this method for setting thresholds has become outdated because spending on food now comprises a smaller proportion of families’ budgets, while medical expenses have increased considerably, in real dollars, over time.

The 1995 National Research Council (NRC) report noted that accounting for medical expenses in a poverty measure is a thorny and complex issue because medical care needs vary greatly across the population—more so than the needs for items such as food and housing—and it is also difficult to put a monetary value on people’s medical benefits, such as Medicare and Medicaid. The report recommended an approach that separates the measurement of income poverty from a measure of medical care needs. It also proposed that out-of-pocket medical care expenses, including health insurance premiums, be subtracted from income. The reasoning was that out-of-pocket medical expenses can affect people’s ability to meet basic needs, which the panel defined as food, clothing, shelter, and utilities (and a little bit more for other basic miscellaneous expenses).

Because the Current Population Survey (CPS) (the current source of official poverty statistics) does not collect information on the amount of medical expenses incurred, the NRC report recommended imputing such



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Experimental Poverty Measures: Summary of a Workshop 5 Medical Expenses The current official poverty measure does not directly take into account people’s medical expenses. It perhaps indirectly takes them into account in that the thresholds were originally devised by multiplying food costs by three to account for other needs, which could be said to include medical costs, among other things. Even if so, this method for setting thresholds has become outdated because spending on food now comprises a smaller proportion of families’ budgets, while medical expenses have increased considerably, in real dollars, over time. The 1995 National Research Council (NRC) report noted that accounting for medical expenses in a poverty measure is a thorny and complex issue because medical care needs vary greatly across the population—more so than the needs for items such as food and housing—and it is also difficult to put a monetary value on people’s medical benefits, such as Medicare and Medicaid. The report recommended an approach that separates the measurement of income poverty from a measure of medical care needs. It also proposed that out-of-pocket medical care expenses, including health insurance premiums, be subtracted from income. The reasoning was that out-of-pocket medical expenses can affect people’s ability to meet basic needs, which the panel defined as food, clothing, shelter, and utilities (and a little bit more for other basic miscellaneous expenses). Because the Current Population Survey (CPS) (the current source of official poverty statistics) does not collect information on the amount of medical expenses incurred, the NRC report recommended imputing such

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Experimental Poverty Measures: Summary of a Workshop expenses to families in the CPS. The technique of assigning medical out-of-pocket expenses to families in the CPS was based on a regression model designed to replicate the full distribution of actual expenses from the 1987 National Medical Expenditure Survey and then inflating the aggregated level of out-of-pocket expenses to equal benchmarks from the National Health Accounts administrative data. Characteristics used in the regression model include age of householder, medical insurance status, family size, poverty status, and race. Current experimental poverty reports by the Census Bureau (e.g., Short, 2001a) offer several ways of accounting for medical out-of-pocket expenses: one subtracts estimates of actual medical out-of-pocket expenses from family income; another adds expected expenses to the thresholds; and a combined method does both. The experimental poverty reports also incorporated two main changes from the original report recommendations that affect all of these alternatives: (1) not to inflate medical out-of-pocket expenses to meet administrative benchmarks, as such benchmarking is not currently done with any other element in the experimental poverty measures; and (2) to use data from both the Consumer Expenditure Survey (CE) and the Medical Expenditure Panel Survey (MEPS). The workshop discussion on medical out-of-pocket expenses centered on whether the poverty measure should include “actual” or “expected” expenditures. That is, should the measure conceptually attempt to take into account people’s actual reported medical expenses, as the 1995 NRC report recommended, or their expected out-of-pocket medical spending needs, based on their demographic and health characteristics (see Banthin, 2004, for more details). A related question, whose answer in large part depends on the answer to the one above, is whether medical expenses should be accounted for by subtracting “actual” (or imputed) out-of-pocket costs from resources (the NRC-recommended method) or by adding expected need to the threshold, or some combination of the two methods. Another related question is whether out-of-pocket expenses should be adjusted for the underconsumption of medical care by the uninsured. In particular, uninsured people often appear to spend little on medical expenses, though some argue that this does not necessarily reflect less need. Adopting the view that the poverty measure should incorporate expected out-of-pocket expenses (treating medical care as a basic need) would tend to lead one to accept adjusting expenses for underconsumption by the uninsured, while those preferring to

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Experimental Poverty Measures: Summary of a Workshop replicate actual expenditures might (though not necessarily) favor not making such adjustment for the uninsured. An advantage of the approach that subtracts actual medical out-of-pocket expenses from income is that it replicates the actual distribution of out-of-pocket medical spending, which varies considerably across families. The disadvantage of this method is that the model that assigns out-of-pocket expenses to families in the CPS is limited to a small set of variables. These variables explain only a relatively modest proportion of the actual variance in medical expenditures. A second disadvantage of this method, as mentioned above, is its treatment of uninsured families. Insurance status is one of the variables included in the model: it carries the assumption that the basic medical needs of the uninsured are accurately reflected by their actual expenditures even though there is evidence that uninsured families forego needed health care services because they cannot afford them (Banthin, 2004). A third disadvantage of this method is its behavior over time. If, for example, the elderly are spending increasingly more on health care than other groups and such expenses are subtracted from their income, they then will look poorer over time even as they enjoy increasing health benefits and longer lives.1 The alternative method, including expected medical out-of-pocket expenses in the poverty thresholds, involves calculating average expenses for different family types on the basis of differences in health insurance cover-age, self-reported health status, presence of elderly family members, and family size.2 This approach explicitly treats medical out-of-pocket expenses as a basic need, with food, clothing, shelter, and utilities. One advantage of this method is that these expenses can be adjusted for the underconsumption of medical care by the uninsured, whose need for health care may exceed their actual spending. The thresholds can reflect the minimum resources needed by an uninsured family to buy a health insurance policy. One criticism of this method is that using expected rather than actual out-of-pocket expenses overestimates medical costs for many families (when compared to their actual expenses) and underestimates the costs for a few families (who experience high medical expenses in a particular year). This 1   These patterns of spending also affect “expected” medical out-of-pocket expense calculations, though less so (see Banthin, 2004). 2   As currently implemented in Census Bureau reports, these calculations involve using data mainly from the CE, but also from the MEPS (Short, 2001a).

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Experimental Poverty Measures: Summary of a Workshop may indeed occur, but Richard Bavier (Office of Management and Budget) pointed out that erroneous poverty classifications resulting from this method were rather modest and the same error also applies to accounting for the cost of housing in the thresholds. Using expected medical out-of-pocket expenses rather than actual expenses tends to produce slightly higher overall poverty rates—about 0.4 to 0.6 percentage points (Proctor and Dalaker, 2003). Elderly poverty rates are relatively lower and child poverty rates are relatively higher if expected costs are added to thresholds rather than subtracting actual costs. Jessica Banthin (Agency for Healthcare Research and Quality) asserted that this difference between the two methods increases the confidence of many researchers and policy makers in using expected costs. A third approach to dealing with medical out-of-pocket expenses that was raised during the workshop and which has appeared in Census Bureau reports involves implementing a combination of the two methods above. First, expected medical out-of-pocket expenses are added to thresholds. Next, the difference between an estimate of actual out-of-pocket expenses and expected expenses is calculated. This net out-of-pocket amount is then subtracted from family income. This method has the advantage of replicating the distribution of actual expenses, though Gary Burtless (The Brookings Institution) argued that this is not necessarily a preferable feature, given that extreme expenses by the elderly in particular are often financed by assets or public funds rather than by income. Many workshop participants indicated support for accounting for medical out-of-pocket expenses in a new poverty measure. While many participants expressed support for adding expected medical out-of-pocket expenses in the poverty thresholds, there was a lack of consensus on how exactly to do so. Many participants also voiced support for adjusting expected expenses for underconsumption among the uninsured, and for not having the calculation of expenses affected by extreme values sometimes observed in the data. Rebecca Blank (University of Michigan) summarized her impression of the wide-ranging discussion: “We should account for … medical out-of-pocket expenses; we should do some adjustment for the uninsured; and we should top code the calculation, to get rid of those who really hit catastrophes, with the idea that that’s picked up in some other ways….” However, she noted, there really was substantial disagreement about whether medical out-of-pocket expenses should go into the threshold or should be imputed into people’s income.