2

Context for the Workshop

To set the context for the workshop, in the opening session the panel’s sponsor spoke about the need and requirements for developing a measure of medical care economic risk. Kathleen Short provided background on the development by the Census Bureau of the new Supplemental Poverty Measure (SPM).

SPONSOR’S PERSPECTIVE

Don Oellerich (Office of the Assistant Secretary for Planning and Evaluation) provided the sponsor’s perspective regarding the need for and the importance of a well-constructed index to help assess people’s medical care economic risk. One of the things that moved him on the issue and ultimately led to the current project was a paper called Who Is at Risk?: Designing a Medical Care Risk Index (Doyle, 1997). Clearly this measure needs to be institutionalized; although the current effort has been linked by some to the Census Bureau’s release of the SPM, it is independent of it.

In a report called Measuring Poverty: A New Approach, a panel of the National Research Council (1995) recommended that there be an economic measure of the ability to afford basic everyday common necessities—food, clothing, shelter, utilities, and a little bit more. The 1995 panel further recommended that a separate measure be developed to measure the economic risk of having medical care costs that exceed people’s ability to pay, even if they have enough income otherwise to meet their basic needs of food, clothing, shelter, and a bit more.



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2 Context for the Workshop To set the context for the workshop, in the opening session the panel’s sponsor spoke about the need and requirements for developing a measure of medical care economic risk. Kathleen Short provided background on the development by the Census Bureau of the new Supplemental Poverty Measure (SPM). SPONSOR’S PERSPECTIVE Don Oellerich (Office of the Assistant Secretary for Planning and Evaluation) provided the sponsor’s perspective regarding the need for and the importance of a well-constructed index to help assess people’s medical care economic risk. One of the things that moved him on the issue and ultimately led to the current project was a paper called Who Is at Risk?: Designing a Medical Care Risk Index (Doyle, 1997). Clearly this measure needs to be institutionalized; although the current effort has been linked by some to the Census Bureau’s release of the SPM, it is independent of it. In a report called Measuring Poverty: A New Approach, a panel of the National Research Council (1995) recommended that there be an economic measure of the ability to afford basic everyday common necessities—food, clothing, shelter, utilities, and a little bit more. The 1995 panel further rec- ommended that a separate measure be developed to measure the economic risk of having medical care costs that exceed people’s ability to pay, even if they have enough income otherwise to meet their basic needs of food, clothing, shelter, and a bit more. 125

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126 MEDICAL CARE ECONOMIC RISK That was 1995, he said, and here we are 16 years later. Although some work was done toward developing this new medical care economic measure following the 1995 report, most of the work focused on the main income poverty measure, culminating in the SPM that the Census Bureau, along with the Bureau of Labor Statistics (BLS), has undertaken. One can question why, with the implementation of health care reform, a medical care economic risk measure is still needed—particularly because health care reform has the promise of expanded coverage, both public and private, increased subsidies for low-income and moderate-income house- holds, the removal of preexisting conditions, the removal of annual and lifetime limits, and the availability of the bronze, silver, and gold benefit packages. Oellerich emphasized that it will be a very important measure, espe- ����� cially now that health care reform is going into various stages of imple- mentation. It can be used to monitor the increase or decline in the number of people at economic risk and to gauge the extent of people’s risk because of medical care needs that they cannot afford, even if they have enough income to meet their other basic needs. Oellerich noted that the issues are related to defining risk, resources, and financial burden. In talking about risk, one is talking about a forward- looking measure, not a backward-looking one. That is the difficult part, he said. One can always look back and say, X percent of the population with an income of Y had medical expenses exceeding 10 or 20 percent of their household income or assets. Looking forward at risk is much more difficult. He concluded by reiterating that a lot of work has been done on the new income poverty measure, the SPM, and the medical care economic risk measure is a separate piece that needs similar effort to move forward. THE SUPPLEMENTAL POVERTY MEASURE Kathleen Short (Census Bureau) provided background on the develop- ment of experimental poverty measures and the SPM at the Census Bu- reau. She explained that the Census Bureau’s work on the SPM is heavily influenced by a document by the Interagency Technical Working Group (ITWG), Observations from the Interagency Technical Working Group (March 2010), which laid out some initial plans for how the Bureau would move forward with the SPM. This document essentially endorsed the recommendations of the 1995 National Research Council (NRC) report Measuring Poverty: A New Ap- proach. It also stressed that the new measure would not replace the official poverty measure and would not be used for resource allocation or program eligibility. It is intended to be a statistical measure of poverty. Without

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CONTEXT FOR THE WORKSHOP 127 funding, the Census Bureau and BLS will produce national estimates for a Research SPM (report was issued November 2011). The 1995 NRC panel struggled with how to incorporate medical care needs into a poverty measure. The 1995 report observed that such needs are highly variable across the population, much more variable than needs for such items as food and housing. Some people may need no or little medical care, whereas others may need very expensive treatments and spend a lot on medical care, resulting in a skewed distribution. If medical care needs are incorporated into the threshold, then one would end up with a large number of thresholds to reflect different levels of medical care need, thereby complicating the poverty measure. As a result, it would be very easy to make an erroneous poverty classification. The NRC panel therefore recom- mended a two-index poverty measure: (1) a measure of economic poverty, which would look at resources adequate to obtain nonmedical necessities (food, clothing, shelter, and utilities), and (2) a measure of medical care risk, which would measure medical insurance coverage or resources adequate to buy needed treatment. The economic poverty measure became the SPM which excludes medi- cal care. The SPM thresholds for economic poverty therefore do not in- clude any medical care needs, and the resources that are compared with that threshold to determine poverty status subtract medical out-of-pocket expenses from income to determine the measure of resources available for other basic necessities. It also does not add the value of medical benefits to income. Experimental Poverty Measures1 Based on the recommendations of the 1995 NRC report, the Census Bureau, with BLS, prepared a set of experimental measures as illustrative examples of what a new economic poverty measure would look like. In 2000, an Open Letter on Revising the Official Measure of Poverty was sent to the Office of Management and Budget and the director of the Cen- sus Bureau, with suggestions on how to move forward with the economic 1  The experimental poverty measures have been updated regularly and are available at www. census.gov/hhes/povmeas/methodology/nas/index.html.

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128 MEDICAL CARE ECONOMIC RISK poverty measure.2 That letter discussed the issue of medical care, modify- ing somewhat what the NRC panel recommended. Specifically, the letter recommended not using the actual out-of-pocket medical expenses for those without insurance coverage, because their lack of insurance protec- tion, combined with low income, might cause them to spend too little on needed medical care. Following the receipt of this letter, staff at the Census Bureau devel- oped another experimental measure in which medical care was included in the thresholds. A set of medical care risk indexes was developed to adjust those thresholds. And part of those indexes included an adjustment for the uninsured, essentially assigning them the spending of the insured. That measure is still produced at the Census Bureau and referred to as medical out-of-pocket expenses in the threshold. The Interagency Technical Working Group The ITWG report also focused on medical care. It noted that self- reported out-of-pocket medical expenses will be collected in the Current Population Survey for the first time in 2010. If this proves to be reasonably reliable for statistical adjustment purposes, then these data should be used as the adjustment for medical out-of-pocket expenses for each family, the report said. The ITWG further emphasized that this approach does nothing to estimate the value of medical care that families are receiving relative to their needs, and additional improved measures of the affordability of medi- cal care and/or the quality of medical care may be useful and important— but these are different statistics and will need to be separately developed and funded. The ITWG also noted the argument that an adjustment to medical out-of-pocket spending should be made for the uninsured, who may be spending less because they lack health insurance and cannot pay for health services. The ITWG therefore recommended that the Census Bureau inves- 2  This open letter resulted from a conference held in 1999 on Poverty: Improving the Definition after Thirty Years co-sponsored by the Institute for Research on Poverty, University of Wisconsin–Madison, La Follette Institute of Public Affairs at University of Wisconsin– Madison, and the Brookings Institution, with funding from the Annie E. Casey Foundation. Through a set of meetings, and commissioned papers, a Working Group on Revising the Poverty Measure made agreed upon recommendations for an improved measure. That letter discussed the issue of medical care, modifying somewhat what the NRC panel recommended. Specifically, the letter recommended not using the actual out-of-pocket medical expenses for those without insurance coverage, because their lack of insurance protection, combined with low income, might cause them to spend too little on needed medical care. For further information on the let- ter, see http://www.census.gov/hhes/povmeas/methodology/nas/files/2August2000OpenLetter PovertyMeasure.pdf.

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CONTEXT FOR THE WORKSHOP 129 tigate the pros and cons of making such an adjustment and its computation in an SPM. The SPM The SPM includes a set of poverty thresholds. They are developed and calculated at BLS based on 5 years of data from the Consumer Expendi- ture Survey and include spending on food, clothing, shelter, and utilities. There are separate thresholds by housing status: owners with and without mortgages and renters. The Census Bureau obtains from BLS a threshold for a two-adult, two-child family, which is adjusted for families of different sizes and com- positions using an equivalence scale. That threshold is then adjusted for geographic differences in the cost of housing, using the American Com- munity Survey. The unit of analysis in the SPM attempts to be consistent with the unit of data collection in the Consumer Expenditure Survey and is slightly differ- ent from the official poverty measure. It uses the idea of the census family, although cohabiters and foster children are also included. The resources used to compare these thresholds are gross money in- come plus the value of in-kind nonmedical benefits—such as the Supple- mental Nutrition Assistance Program; free or reduced-price school meals; the Special Supplemental Nutrition Program for Women, Infants, and Chil- dren; housing subsidies; and the Low Income Home Energy Assistance Program—that families can use to meet their food, clothing, shelter, and utility needs minus income taxes, payroll taxes, and other nondiscretion- ary expenses. The expenses that are subtracted are taxes, medical out-of- pocket expenses, child support paid, and child care and other work-related expenses. Short next showed the impact on the poverty rates of the additions and subtractions to people’s income in order to move from the official poverty measure to the SPM. Looking at the aggregate numbers across the entire population, not much is added to income, but subtractions are substantial in terms of income taxes before credits, payroll taxes, work expenses, and medical out-of-pocket expenses that are very large. For those who are classified as poor under the official poverty mea- sure, the picture is more balanced, because most of the transfers added in the supplemental measure—food stamps, school lunch, housing subsidies, the earned income tax credit—are aimed at people at the lower end of the income distribution. There are also some subtractions; the main item being subtracted for this group of people is medical out-of-pocket expenses. The official poverty rate in 2009 was 14.5 percent using the official definition. The poverty rate using the SPM rate is slightly higher at 15.8

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130 MEDICAL CARE ECONOMIC RISK percent. Differences between the two measures are also observed across age groups, showing a lower poverty rate with the SPM for children, a slightly higher poverty rate for nonelderly adults, and a much higher poverty rate with the SPM for the elderly. The impact on the poverty rate (the percentage of people below a given threshold) can be calculated with the inclusion of each element. For example, when the earned income tax credit is added, the supplemental poverty rate goes down by about 2 percentage points. With the addition of food stamps, it falls by about 1.5 percentage points. At the other end, the subtraction of medical out-of-pocket expenses from income raises the poverty rate by 3.4 percentage points. When these same calculations are done for children, there is a large reduction in poverty rates from the inclusion of in-kind benefits, but not so much when the calculations are done for the elderly. However, subtracting medical out-of-pocket expenses increases the poverty rate for the elderly by 7 percentage points. Short mentioned recent research on the subject undertaken by the Census Bureau, specifically Medical Out-of-Pocket Spending Among the Uninsured, a paper presented at the Joint Statistical Meetings in August 2011. This paper examines the poverty rate under different treatments of medical out-of-pocket spending. One purpose was to make the adjustment to medical out-of-pocket spending for the uninsured. A second purpose was to assess how the SPM might respond to policy changes in health care. The SPM was calculated under two different environments: (1) assign- ing to the uninsured the medical spending of the insured and (2) implement- ing the key features of the Affordable Care Act. Statistical matching between the insured and the uninsured was used as a method to assign the medical out-of-pocket spending of the insured to the uninsured. And the key provisions of health care reform to be implemented in 2014 were considered, such as adult Medicaid expansion for those with family income up to 138 percent of the family poverty level, eligibility levels for the Children’s Health Insurance Program to be maintained by the states, state health insurance exchanges, and insurance premium subsidies for up to 400 percent of the family poverty level. No assumptions were made about any behavioral changes in response to implementing those measures in calculating the effect on the SPM. SPM rates were calculated under the three scenarios: (1) before any adjustments, the poverty rate was 15.8 percent; (2) when the spending of the insured was added to the uninsured, the poverty rate increased to 19.4 percent; and (3) under the provisions of health care reform, the poverty rate was 16.4 percent, also an increase. Similar results were observed for chil- dren and for nonelderly adults. For nonelderly adults, rates calculated by race and ethnicity showed big differences, especially for the uninsured and

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CONTEXT FOR THE WORKSHOP 131 for Hispanics. Clearly the uninsured are the ones to whom larger spend- ing is assigned, and Hispanics have a high probability of being uninsured. These findings indicate that, without the health insurance adjustment, im- plementing the provisions of health care reform would register that people are worse off with this economic poverty measure. Considering the pros and cons, Short expressed the view that one would not want to make this adjustment because it would be inconsistent with other elements of the SPM, because everything else in the SPM is based on out-of-pocket spending. The uninsured who become insured are recorded to be worse off eco- nomically because they are now spending more than they were spending before. Because increased spending is compared with the same income, without making this adjustment, the rates indicate that, with health care reform and health insurance coverage, people are recorded as worse off. She ended with the comment that a complementary measure is needed that shows they are better off in the domain of health care with health in- surance coverage. The medical care risk measure might fill that need.

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