Speech to PAHO Conference on Poverty Measurement Washington, DC September 2003

Transcription

1 Speech to PAHO Conference on Poverty Measurement Washington, DC September 2003 Good morning, I was pleased to accept your invitation to speak on the role of health should play in the measurement of poverty for one simple reason. It has been eight years since the publication of the NAS Panel report and requests for speeches on this topic are quite infrequent. For those who have read the NAS Panel s report on poverty measurement and the dissent by one of its members, one may get the impression that this was and is a contentious issue. It is. Not because anyone believes that health is unimportant to the concept of poverty but because there is honest disagreement over the appropriate method to incorporate health into a poverty measure. The goal that I have for my remarks today is to describe the Panel s rationale for their recommendations in the context of two substantive alternatives that they considered. The current official poverty measure in the US asks whether a family has sufficient cash (and hence extremely fungible) resources to meet a specific level of consumption needs that the government deems necessary for their livelihood. Now it might surprise an outside observer that the government is unable to definitively detail how the total amount of needs expressed in the threshold can be allocated to specific categories of need such as shelter and transportation or whether certain goods are even included the government s definition of need. For example, do we know whether or not health care needs are even included in the threshold amounts? One would think so. But based upon personal conversations, Gordon Fischer notes that Molly Orshansky did not intend that health care to be included in the construction of the poverty thresholds. For sake of argument, let us assume that the current thresholds do not reflect any amount placed on health care needs. Does that mean

2 that health plays no role in determining who is poor in the US? Of course the answer is no. Those in poor health will likely have lower wages and salaries than those in better health and hence have a higher chance of being labeled poor. Health status plays a role in current poverty measurement although an indirect one. The billions that the US spends on medical care annually are testament that individually and collectively the nation believes that health must be an important determinate of well-being. To reflect this national priority, one might assume that medical expenditures should be directly recognized as important component of a family s needs and included as a component of the poverty threshold just as other necessities such as food, clothing and shelter. And to maintain consistency in the poverty measure, one would want to account for any direct or indirect provision of medial assistance from employers or government. The problems and the disputes arise when one suggests a specific way to include medical needs. The straightforward approach would be to determine and add an appropriate amount for the medical needs of a family to the amounts of needed consumption for other basic needs such as food, clothing and shelter. A typical suggestion is that the value of a health insurance policy that would cover 100% of a minimum but socially acceptable medical events would be added to the level of non medical needs. Another variant is the insurance value (premium) of a policy that would cover a selected array of medical contingencies but would also require some level of coparticipation by the family may be used. In this case, the premium for the policy and the expected amount of medical out of pocket expenditures would used to reflect the medical needs of the family. To identify poor families, this revised poverty threshold would be compared to an expanded measure of the family s available resources that would include the insurance value of either government or employer provided health care insurance. I will denote this approach as the single index (step) insurance value methodology.

3 This approach may be appealing especially to economists who will favor collapsing numerous heterogeneous goods in a single metric of either utility or dollars. However the Panel, that had its share of economists, had concerns with regards to its use and its practicality. The first concern was the issue of fungibility. When the insurance value of either government or employer provided health insurance exceeded the insurance value of the minimum policy, the family s measure of available resources overstated their ability to finance their non-medical needs. The second area of concern was whether such a measure was even feasible to implement. Could sufficient data be collected to provide reliable valuation of the health care coverage provided by employers. The debate over the Clinton health care plan raised concerns on the Panel whether a consensus could be forged on what would constitute a socially acceptable set of medical contingencies to be included in any health care plan. Faced with these concerns, the Panel then considered alternative approaches that conceivably would place less demands on the data while also recognizing medical insurance was less fungible than cash. One such alternative was proposed by Aaron who had attributed the idea to Burtless. In order to avoid the problems of valuing health insurance policies, Aaron/Burtless proposed a two step procedure where two types of poverty were identified. The Cash Poor were those individuals who had insufficient cash income to meet their non medical needs plus an amount reflecting their expected medical co-payments from a specified insurance policy. The Medically Poor were those individuals who were under or uninsured AND did not have sufficient cash income to buy the specified insurance policy in addition to their other needs. Aaron/Burtless proposed that the POOR would be those individuals and families who were either CASH POOR or MEDICALLY POOR.

4 The Panel was attracted to the idea of creating separate indexes one to reflect the family s ability to meet non medical needs and an expected amount of medical out of pocket expenditures and a second that focused upon meeting their medical needs they still had several concerns with the specification of medical needs in the Aaron/Burtless and other two step approaches. The crux of the difference of opinion lied in whether poverty was either an ex ante or ex post concept. Consider one family whose cash income is $1,000 less than their nonmedical needs plus $2,000 reflecting their expected amount of medical out of pocket. But if they are healthy during the year and hence spend only $500 they will have sufficient cash income to meet their non-medical needs. Should we really consider them poor? Conversely, consider another family who is $1,000 over their combined non-medical and expected medical out of pocket needs but suffers a $5,000 medical emergency that must be paid out of their own pocket. Should not this family be considered poor? Given that poverty we believed should reflect the actual not the expected risks that individuals face in a society, the use of actual instead of expected out of pocket spending seemed more appropriate and was reflected in their recommendation to measure economic poverty as those individuals and families who do not have sufficient cash resources to meet their non medical needs after accounting for their actual medical out of pocket expenses. While the Panel s recommendation for economic poverty and the Aaron/Burtless for cash poverty are mathematically similar, the Panel s intention was to propose a poverty measure that reflected the family s ability to meet their nonmedical needs only. The Panel s measure recognized a priority for health needs by implicitly assuming that those needs will be first met prior to the family s non-medical needs. However, the Panel recognizes that such a determination can t be accomplished independent of their medical needs. While the written dissent to the Panel s report focused upon how over insuring and over utilization of medical services could inflate the poverty count, others have focused upon the converse. A general

5 lack of resources and availability of medical care will be reflected in smaller expenditures on care and hence under state ranks of those in poverty. To draw attention to the lack of access to medical care, the Panel proposed that health care indexes or indicators be developed. The Census Bureau with their count of individuals and families who lack insurance is one such measure. Improvements along the lines suggested by Aaron and Burtless could be made. However, the Panel believed that nature of the underlying problems and likely policy solutions for those who find themselves in Economic versus Medical poverty to be sufficiently different that they should not be lumped together into one pool of poverty. My mother is fond of the saying, When you have your health, you have everything especially when she makes reference to her relative lack of goods during the 1930s depression of her youth. This adage suggests a lexicographic order of human needs where individuals would be willing to sacrifice enormous personal resources to improve or maintain ones health. The implications for poverty measurement should be evident regardless of the income that they possess, only those in poor health would be considered poor. The point of this observation is not to suggest that my mother s views lend themselves for a sensible foundation for poverty measurement but to raise the question, what role does health play in poverty measurement today? I would like to conclude with one observation. The Panel s recommendation while appearing to be more feasible to implement than the other alternatives does rely upon collecting data on the actual out of pocket medical spending of families. The data that we currently utilize for poverty analysis does not collect this information and it must be imputed. Given the significant variation in this type of spending across individuals with similar characteristics, some concern has been raised whether the large impacts on the poverty counts of this proposal are real or an artifact of the imputation. This of course is a concern especially when we focus upon the level of

6 poverty. But we have to remember that the level of poverty in any year for any group is in large part arbitrary. What we learn in the analysis of poverty is the relative poverty between groups of individuals and comparison across time.

7 Single Index Insurance Measure of Poverty Needs = Needed Non Medical Consumption NMN (Food, Clothing, Shelter, and other needs) + Premium for Insurance Policy that covers needed medical contingencies -- PIP + Expected Medical Co-Payments EMOOP Resources = Adjusted Cash or Money Income -- ACY (Panel recommended from the current definition subtracting taxes and a limited amount of work related expenses but adding the value of government in-kind benefits that supplemented the family s consumption of their non medical needs) + Insurance Value of Employer or Government provided Health Insurance -- PEGI A family would be poor if ACY + PEGI < NMN + PIP + EMOOP ACY + PEGI < NMN + PIP100 Where PIP100 is the premium covering 100% of needed medical contingencies Problems Fungibility of Insurance Can this approach be implemented?

8 Aaron-Burtless Two Step Approach Determine if the family is Cash Poor Does the family have sufficient resources to purchase both non-medical needs and meet their expected medical copayments? If not then they are cash poor Cash Poor if ACY < NMN + EMOOP Determine if the family is Medically Poor If a family is either under or uninsured then does the family have sufficient resources to purchase an insurance policy that would cover their medical needs without making themselves cash poor. If not then they are medically poor Medically Poor if Under or Uninsured and ACY < NMN + EMOOP + PIP Family is poor if they are either Cash Poor or Medically Poor Questions Is an ex ante approach really appropriate? Is the ability of families to meet their non medical and medical needs really comparable or should they be kept separate?

9 Panel Recommendation A family is poor if ACY AMOOP < NMN (ACY < NMN + AMOOP) Further the Panel recommended development of one or more medical care risk indexes that measure the economic risk to families and individuals of having no or inadequate health insurance coverage. However, such indexes should be kept separate from the measure of economic poverty.