Economists have long debated whether material well-being is better measured using estimates of a household’s income or consumption. Many conclude that an ideal consumption measure offers a better approximation of household members’ long-term well-being (or permanent income) than measures based on current income flows. Unfortunately, ideal consumption data are not currently available, and the cost of collecting them makes it unlikely they will be available anytime soon. To estimate consumption analysts ordinarily rely on imperfect measures of current consumption expenditures, and expenditures do not fully reflect all consumption flows. For example, consumption expenditures on housing provide a poor measure of the consumption flows enjoyed by people who own their homes. Actual household spending on medical bills and health insurance premiums similarly provides an unreliable indicator of the health care consumption enjoyed, on average, by people who are covered by a group health plan. Some health consumption is financed with employer contributions to employee health plans, and almost half of health care consumption is financed with governmentprovided insurance, primarily medicare and medicaid. Home ownership and generously subsidized health insurance are particularly important in determining consumption flows of the aged.
In previous research with Barry Bosworth and Sarah Anders, I examined the impact on the income distribution statistics of developing better measures of capital income flows. Our estimates included a measure of the flow of income that households derive from owner-occupied homes (Bosworth, Burtless, and Anders 2007). In this paper I develop and examine alternative measures of income that combine estimates of households’ annual cash income and the health care consumption they obtain that is not financed out of current cash income. The Census Bureau has developed and published expanded income measures that include the insurance value of major kinds of government- and employer-provided health insurance (U.S. Bureau of the Census 1993). I extend the earlier Census analysis by examining the actual distribution of health care consumption and health care financing across U.S. households. In addition, I analyze the relationship between health spending and payment patterns, on the one hand, and age and position in the income distribution, on the other.