What is the measure of poverty? Briefly explain it. How is it calculated?

BLANK: A poverty measure has two components: a threshold and an income definition. The threshold is the amount that determines economic need; whether your family’s income is above or below the threshold determines whether you are poor or not. The threshold in the U.S. varies depending on family size. The income definition defines which income resources are counted in a family’s income in determining whether or not they are poor.  We use cash income as our income definition in the U.S. measure of poverty, without taking account of tax payments, in-kind income from government programs, work expenses or health care.

What is the poverty measure based on?

BLANK: The U.S. definition of poverty was created in 1963, as part of the War on Poverty effort, and first used in 1964. It was based on consumption data from the late 1950s , when  people spent about one-third of their income on food. The threshold was basically set at three times the amount established as an emergency food budget. Today, Americans spend about 11 percent on food. In 1963, basing economic wellbeing on cash income was probably the right thing to do – many families didn’t have health insurance, mothers were not working, childcare wasn’t an issue, and few low-income families had to pay federal taxes.  It’s not the right thing now.  

Has the government made any changes to that definition?

BLANK: We have not made changes at all to this definition. The threshold simply gets updated annually by the Consumer Price Index.

What are the problems with a measure that hasn’t changed?

BLANK: Our threshold number is three times the 1950s food budget, but that has no conceptual meaning in today’s world. And, cash income as an income definition makes almost no sense because we are now in the world where low-income families interact several ways with the tax system, such as through the Earned Income Tax Credit, which is not factored in to the poverty calculation.

Also, we’ve expanded a whole variety of in-kind federal public assistance programs that don’t pay individuals cash but provide them access to a particular good—housing, food stamps, Medicaid. We’ve enacted a large number of social assistance programs that make poor people better off but which aren’t showing up in our poverty measure because they aren’t part of cash income. Moreover, we are in a world in which large numbers of women work, so childcare costs also should be factored in.

Finally, this poverty measure pays no attention to other well-being issues, such as health status or the availability of health insurance.  We should want to measure these other issues, particularly as the costs of health care rise rapidly.    

So, health care and related costs have risen in importance and now consume a larger portion of household income. What does a typical household spend on health care? 

BLANK: The poorest one-fifth of the U.S. population spent about 8 percent of their income on health care based on the 2005 Consumer Expenditure Survey. Those in the top one-fifth of the income bracket spent about 4 percent of their income on health care. This is based on what consumers spend, and does not factor in employer or government spending on behalf of consumers.

Where does out-of-pocket health care spending fall vis a vis other household costs?

BLANK: Housing, which includes energy, is the biggest expense: 39 percent for people at the bottom 20 percent of the income distribution; 31 percent for people at the top of the distribution. Transportation is next, at 14 percent for the bottom 20 percent, and 17 percent for the top 20 percent. The Consumer Expenditure Survey does not break out child care costs. Food comes in third.

What makes health care different vis-à-vis housing or transportation? Should those costs be calculated in?

BLANK:  I think of health care costs as similar to work expenses – in order to work, you need to pay transportation and childcare expenses as well as keep yourself healthy. I believe that expenditures on these items should be subtracted off from income when measuring poverty.   I would want the income definition to include  the resources I have available to spend on food, shelter and clothing after I’ve done all the things I am expected to do to keep myself reasonably healthy and get myself to work.  This would mean defining income post-tax, post work-expense,  and after removing out-of-pocket health expenditures.

So our measure of poverty is no longer reflective of the biggest financial obligations households face?

BLANK: Right. More importantly, the measure is not sensitive to the various ways that we implement policy to make low-income families better off. In the 1970s and 1980s, we expanded food stamps and Medicaid, none of which showed up in the poverty measurement. Similarly, in the 1990s when we expanded the Earned-Income Tax Credit, we were not able to see the effects of that on the poverty rate because our poverty measure is based only on pre-tax earnings.  You want a poverty measure that is sensitive to the programs and policies you have that are designed to address the well-being of low-income families.  We don’t have that.

So many low-income families are really better off because they are getting these forms of assistance that aren’t calculated by the poverty measure? Does that mean we’d have fewer people in poverty?

BLANK: Some are better off, some aren’t. It depends on what we are talking about. If we are talking about in-kind programs, there is no question that if you added in food stamps, housing assistance and the Earned Income Tax Credit, that would increase people’s resources, and therefore, there would be more people above the threshold.

On the other hand, more people might fall below the threshold if you take into account out-of-pocket health care costs and work expenses, including childcare.  Whether these changes would raise or lower poverty on net is an open question.

So how do you go about adding health care costs to the poverty measure? 

BLANK: The first question to answer is whether you include government spending on low-income people through programs like Medicaid. The problem with this is it is all going to healthcare. An elderly person who receives $35,000 in Medicaid payments over the year, but doesn’t have a penny to spend on food, rent and clothing, would not be considered poor if we counted Medicaid spending as part of income.  

So you can’t just look at expenditures, because expenditures on health care don’t tell you anything about well-being. In fact, when health care spending is very high, that almost always tells you that well-being is very low. Unlike other government transfers where you give people $100 in food stamps and think you can just add $100 into their resources, you can’t do that with Medicare or Medicaid payments. So simply adding the amount of government transfers to people’s income isn’t right, it gets you to the wrong place; sick people would never be poor under such a scenario.

What’s an alternative way to add health care costs to the poverty measure?

BLANK: The next option is to add in the insurance value. If Medicaid provides me insurance and it’s calculated that it is worth $4,000, then that is added to my income. The problem is that this may not reflect its true value, because I can’t eat it, I can’t pay the rent with it, and I wouldn’t use the $4,000 that way if you gave it to me in cash. So, even the insurance value here is not necessarily the right answer. Now, there is a lot of debate about that, and some people think insurance value is the right answer. This is a somewhat controversial point. I think most economists would agree with me that insurance isn’t the same as cash, but not all people would.

OK, so is there a better option?

BLANK: Well, the next option is looking at out-of-pocket medical expenditures. Let’s see what I pay out of my pocket that I can’t spend on food, shelter and clothing and take that off of my resources before you estimate whether I am poor or not. This is the recommendation the National Academy of Sciences put forth for improved poverty line calculation. If I’m insured, I probably have relatively low out-of-pocket expenditures. As a result, I look better off than someone who doesn’t have any insurance. Similarly, if I’m ill and I pay more out-of-pocket, that means I have less money to spend on the economic necessities.

The problem with this, of course, is the uninsured don’t buy the same sort of care. They literally don’t go to the doctor, and it is difficult to adjust calculations for this. 
The National Academy of Sciences report said two things: 1) let’s use out-of-pocket expenditures; and 2) let’s detach well-being as a separate measure.  They recommended a second set of measures of overall health-related well-being.  For instance, we might have a measure of the degree and quality of health insurance, or a measure of overall health status.

Is there a right way to combine poverty and health coverage in one measure?

BLANK: No. It is very difficult to create a poverty measure that also reflects health status, despite the desire of many to combine them. I think the better answer is to report two different statistics.  Currently, we don’t have an official statistic on health status or adequacy of health insurance coverage; our closest measure is publishing the share of the population that is uninsured, but even that does not reflect well-being or the quality of insurance.  

Ok. What makes sense to you – is there a way to calculate healthcare costs into the equation that really makes sense?

BLANK: I feel strongly that you have to subtract the out-of-pocket expenditures on medical care when estimating who is and isn’t poor, especially since costs have risen so much that uninsured individuals can face huge bills. In estimating poverty status, we need to take into account families who cannot afford rent or food because of their health expenses. 

If you get a bigger house or you buy more food or nice clothes – having more money to spend on these things increases your well-being. However, when you fall ill suddenly, and spend all sorts of money to make yourself as healthy as you were before getting sick, your level of well-being hasn’t risen.  Hence dollars spent on healthcare are different from dollars spent on necessities.  They are like work expenses or taxes, money that has to be spent but which shouldn’t be counted as part of your discretionary income.

What would be the likely impact if health care costs were part of the poverty measure? Would there be more people in poverty?

BLANK: The biggest impact would be seen on the elderly, because the elderly are the ones who have the largest out-of-pocket expenditures. The next biggest impact would be on families with substantial healthcare costs, such as from asthma or a chronic condition.  This is disproportionately found in families of color; it tends to be people in certain age ranges. 

So does including health care costs in the poverty measure better inform policymakers?

BLANK: It does two things. It gives us a better sense of where different groups fit relative to other groups in their economic well-being and in establishing poverty counts.   Those people, like the elderly, with large out-of-pocket expenses should be poorer, while those who receive in-kind assistance should be better off. The second thing it accomplishes, is that it provides a much better sense of how economic wellbeing is changing in the long run. If we created national health insurance, for instance, that should show up as lower out-of-pocket expenditures and would, therefore, affect the bottom line on the poverty count.

What needs to happen so that health-related costs are added to the poverty measure?  

BLANK: We need to work on a measure of health well-being exclusive from economic needs; for this, we need to look for measures in addition to the percentage of uninsured people. To change the poverty line, we should commission a government statistical agency to create and continually update a revised poverty line that takes account of out-of-pocket health care costs (as well as taxes, in-kind government benefits, and work expenses) in calculating the disposable income that families have available to spend on food, shelter and clothing.

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