Critics of U.S. poverty measurement have long complained that the official poverty definition has serious defects. These deficiencies are most apparent in its treatment of health spending. Unfortunately, there are no simple methods to incorporate medical spending in poverty measurement in a way that commands wide support among poverty specialists.
This paper examines the effects of three methods of including household spending on health care in the measurement of poverty. The first is the method embodied in the current poverty statistics. The second is based on the proposal of a National Academy of Sciences panel. The third adds an estimate of “reasonable” medical spending to the modified poverty thresholds proposed by the NAS panel, which include poverty budgets for food, clothing, and shelter.
Two conclusions stand out in our analysis. First, the inclusion of medical spending in the poverty definition has a large effect on the level and composition of poverty, providing a very different picture than the one produced using the official poverty guidelines. Groups that are heavy users of medical care, such as the aged and disabled, appear to suffer relatively worse poverty when explicit account is taken of the burden of medical spending. This is true whether medical spending is subtracted from family resources—as proposed by the NAS panel—or approximations of “reasonable” spending levels are added to the poverty thresholds. Under either of these procedures, groups with high out-of-pocket expenditures on health care appear to suffer worse poverty rates than revealed by the official poverty statistics.
Second, the level and composition of poverty are comparatively unaffected by the decision to add “reasonable” medical spending to poverty thresholds rather than subtract actual medical spending from family resources. By judiciously selecting estimates of “reasonable” health spending, analysts can derive estimates of poverty thresholds that nearly duplicate the level and pattern of poverty found when actual medical spending is subtracted from family resources. The choice between these two methods of measuring poverty depends on the user’s theoretical preferences, since both approaches to including health spending produce essentially identical pictures of the nation’s poor.