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3
Concepts of Resources
This chapter examines issues in defining resources for use in measur-
ing medical care economic risk (MCER)—the prospective risk that an
individual or family will be unable to afford needed medical care or will
be at high financial risk.1 In the end, the choice of a measure of resources
will be tightly constrained by the choice of a survey to serve as home to a
measure of MCER, and in this decision the measurement of medical care
risk is likely to dominate the measurement of resources. Nevertheless, it
is important to understand the key issues that exist in defining resources
and the potential implications of including or excluding particular types
of resources. The official measure of poverty in the United States as well
as the new Supplemental Poverty Measure (SPM) are income-based and
therefore more appropriately described as measures of income poverty. The
resources available to families in meeting their financial needs also include
assets—the product of families’ saving and investment activities over the
life course. In this chapter we consider what sources of income should be
included in the definition of resources in measuring MCER and whether
some portion of assets should be included in resources as well. In Chapter
5, we review the strengths and weaknesses of alternative data sources for
measuring resources in addition to measuring premiums and other out-of-
pocket medical care costs.
1
As we noted in Chapter 2, the proposed measure of medical care economic burden, which
is derived from the SPM, will use the SPM definition of resources.
51
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52 MEDICAL CARE ECONOMIC RISK
CONCEPTUAL ISSUES IN DEFINING RESOURCES
A fundamental question facing the panel is whether the definition of
resources to be used in measuring MCER should be equated with either of
the income concepts that the Census Bureau employs in producing the of-
ficial estimates of poverty in the United States or the new SPM published in
November 2011, or whether a different concept would be more appropri-
ate. In this section we discuss the Census Bureau income concepts and some
of their limitations, review two alternative income concepts (Haig-Simons
and federal income tax) and a consumption-based concept, and discuss the
role of assets in meeting financial needs.
Income Concepts in Poverty Measures
The Census Bureau uses a reasonably well-defined concept of money
income to produce the official, annual estimates of household income and
poverty for the United States. A family’s annual money income, as measured
in the Current Population Survey Annual Social and Economic Supplement
(CPS ASEC), is compared with a threshold value that varies by family size;
the number of children under age 18; and for one- and two-person house-
holds, whether the family reference person is age 65 or older. For the SPM,
the Census Bureau substitutes a measure of disposable income for money
income and uses an alternative set of thresholds. The two sections below
define these two income concepts, laying out what they include and what
they do not include.
Money Income
The Census Bureau’s concept of money income as applied in the CPS
ASEC is defined as total pretax cash income excluding lump sum payments
and capital gains (Ruser, Pilot, and Nelson, 2004). Common sources of
income that may be received as lump sums and therefore excluded from
money income include bequests, life insurance (both survivor benefits and
withdrawals of accumulated cash value unless converted to an annuity),
and cashouts or withdrawals of pension and retirement funds. In excluding
lump sums, the Census Bureau distinguishes between lump sums and regu-
lar payments, implying that these are the only two ways that income from
these sources can be received. With the growth of new types of retirement
accounts, which we discuss below, people make periodic withdrawals that
are neither regular payments nor lump sums as these terms are commonly
understood. This ambiguity is one of the issues with the application of the
concept of money income—particularly for the measurement of economic
well-being.
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CONCEPTS OF RESOURCES 53
Another issue is that, in being restricted to cash, money income excludes
the value of noncash benefits, which have become increasingly important
in sustaining a segment of the population. Benefits from the Supplemental
Nutrition Assistance Program (SNAP, formerly the Food Stamp Program)
have an explicit cash value, which recipients use to purchase food. The free
and reduced-price meals that students receive through the National School
Lunch and School Breakfast Programs have an explicit monetary value as
well, although their value is more restricted in its use than SNAP benefits.
Housing subsidies are another type of noncash assistance that can be as-
signed a value. For decades, researchers and the Census Bureau itself have
used the reported value of SNAP benefits and assigned cash values to other
noncash benefits in order to develop alternative measures of income for
the purpose of measuring the contribution of federal and state programs
to combating poverty (see, for example, DeNavas-Watt, Cleveland, and
Webster, 2003; Smeeding, 1982).
Disposable Income
As a general concept, disposable income subtracts taxes from a pretax
measure of income. The Census Bureau’s concept of disposable income, as
used in the SPM, adds the cash value of noncash benefits while subtracting
not only taxes, but also work-related expenses (including child care), child
support payments to another household, and medical care out-of-pocket ex-
penses (including premiums).2 Disposable income is intended to reflect the
income that is actually available to families to meet their economic needs
for food, clothing, shelter, utilities, and other basic necessities.
Limitations of CPS Income Concepts
Chapter 5 discusses a number of issues that affect the quality of income
measured in household surveys. This chapter focuses on conceptual issues
that contribute to the CPS ASEC underestimating income from two sources:
retirement and self-employment.
Retirement Income
As people approach age 65, they reduce their work hours at an increas-
ing rate, and many move into formal retirement. As this process unfolds,
earnings decline as a share of total family income and are replaced by a
variety of types of retirement income. The vast majority of retirees receive
2
Work-related expenses are capped at the amount of the secondary earner’s earnings.
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54 MEDICAL CARE ECONOMIC RISK
Social Security benefits, which many supplement with income from other
sources. Not long ago, many received a traditional defined benefit (DB)
pension, whereby employers paid retirees and their survivors a monthly
benefit for life. In the private sector, DB pensions have been largely re-
placed by newer forms of retirement income in which employers and em-
ployees contribute funds to pension and profit-sharing accounts that the
employees manage as financial investments until they need to withdraw
funds to meet needs in retirement. DB pensions generate a regular income
flow, very much like Social Security benefits, but the newer, defined con-
tribution (DC) pension plans do not. Similarly, individual retirement ac-
counts (IRAs) allow individuals to create their own tax-advantaged savings
plans completely separate from employment. Here, too, the resources that
people accumulate in such plans are later tapped by making withdrawals
rather than receiving fixed payments. These new options for replacing the
earnings that are forgone in retirement have given rise to both conceptual
and measurement issues in determining how to value the resources that
these plans generate.
Withdrawals from savings, in general, are not construed as income
under the Census Bureau or alternative income concepts discussed below,
but the tax-advantaged savings plans that are replacing DB pensions receive
a different treatment. Thus, for purposes of federal income taxes, distribu-
tions from these plans are counted in adjusted gross income (AGI)—and
taxed as ordinary income—except for returns of contributions made with
after-tax dollars and rollovers to other tax-advantaged retirement vehicles.
Similarly, CPS ASEC money income includes regular payments from an
IRA, Keogh, 401(k), 403(b), or similar thrift plan. “Regular” is interpreted
by the respondent, but comparisons with fund withdrawals that can be
documented with administrative data indicate that very little of what is
withdrawn from these funds is being reported as income in the CPS ASEC.
For example, in 2004, Americans withdrew $139.9 billion from IRAs,
excluding rollovers, according to data collected by the Internal Revenue
Service (IRS) (Bryant, 2008). Of this total, $101.7 billion or 73 percent
was taxable—that is, counted in AGI. For the same year, the CPS ASEC
estimated only $6.8 billion in regular payments from not only IRAs but
also Keogh and thrift plans (Czajka and Denmead, 2011). Another Census
Bureau survey, the Survey of Income and Program Participation (SIPP),
separates regular and lump sum withdrawals from IRAs, Keoghs, and thrift
plans. The CPS ASEC estimate for 2009 was 23.4 percent of the SIPP esti-
mate of regular withdrawals from these plans and 15.5 percent of the SIPP
estimate of total withdrawals (Czajka and Denmead, 2011).
Withdrawals from the newer sources of retirement income are still
dwarfed by payments from more traditional plans—namely, Social Security
benefits and DB pension payments—and the CPS ASEC captures high per-
centages of these income sources (over 90 percent for Social Security; see
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CONCEPTS OF RESOURCES 55
Czajka and Denmead, 2008). The mix is shifting, however, and the implica-
tion is that, without a new approach to defining and measuring retirement
income from nontraditional sources, the CPS ASEC will understate the
income of the elderly by an increasing amount in the years to come, which
could introduce a trend toward overestimating medical care economic risk.
Self-Employment Income
Theoretically, self-employment income is a net income: the revenue
taken in by a business over a period of time minus the expenses incurred
over the same period of time in order to generate that revenue. If a business
generates inventory, then that would be factored in as well. If the busi-
ness has a single owner (a sole proprietor), then all of the net income from
the business should be assigned to the single owner. Alternatively, a business
may have multiple partners, in which case the partnership’s net income is
allocated among the partners. A given partner’s share of the net income
is determined by that partner’s ownership share in the partnership.
Determining the net income from a business can be exceedingly com-
plex. The proprietor’s tax return provides one measure, but is a tax-based
measure conceptually appropriate for determining the contribution of the
business to the owner’s overall economic well-being? The designers of the
SIPP thought otherwise. They recognized that a business owner may draw
a salary from a business, which could provide a positive income flow even
if the business lost money overall. Rather than measuring just the profit or
loss from a business, then, SIPP included in self-employment income the sal-
ary that the owner drew from a business. The net profit or loss was added
to the salary to produce a measure of total self-employment income from
that business for a given reference period.
The Census Bureau has not adopted in the CPS ASEC the SIPP approach
to defining and measuring self-employment income. For this and other
reasons, the CPS ASEC identifies substantially less self-employment income
than the SIPP. For 2009, the SIPP estimate of aggregate self-employment
income was 80 percent higher than the CPS ASEC estimate (Czajka and
Denmead, 2012). Most of the difference occurred among families above 400
percent of poverty, for whom SIPP self-employment income was double that
of the CPS ASEC, but SIPP was higher at all ranges of relative income above
150 percent of poverty.
Other Income Concepts
Accrued Versus Realized Income
An issue that must be addressed in defining income is whether income is
counted as it is accrued or when it is realized (Nelson, 1987). Consider, for
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56 MEDICAL CARE ECONOMIC RISK
example, a DC pension plan. The employer makes periodic contributions to
the employee’s account. Each year the account earns interest or dividends
or both. After many years, the employee begins to withdraw funds from the
account. If income is counted as it is accrued, then the employer’s contribu-
tions will be counted in the year that they are made, and the interest and
dividends will be counted in the year that they are credited to the account.
If income is counted when it is realized, neither the employer’s contributions
nor the interest and dividends will be counted until they are withdrawn.
The purpose for which income is being measured determines which of these
approaches is more appropriate. For macroeconomic applications, counting
income as it accrues is equivalent to counting income as it is generated by
the economy, and that will generally be the preferred approach. For ap-
plications to measuring the adequacy of income to meet recipients’ needs,
however, counting income as it is realized may be more appropriate. The
distinction between accrual and realization of income will be important
when we consider what to do about assets when defining resources for the
purpose of measuring MCER.
Haig-Simons Income
A frequent starting point for discussions of alternative income con-
cepts is the notion advanced by Haig (1921) and later Simons (1938) that
economic income is consumption during a period plus the change in net
worth. Stated somewhat differently, economic income is the amount that
can be consumed (over a specified period of time) without changing net
worth. Implicit in this notion is the idea that a net growth in assets—or a
net reduction in debt—is as much a part of income as a salary or wages.
Haig-Simons income provides a useful framework for thinking about the
broad range of resources that might be included in a measure of MCER.
Tax-Based Income
Providing a sharp contrast to the accrual focus of Haig-Simons income
is the concept of income that is applied to individuals by the federal tax
code. This tax-based concept, which recognizes income only when it is re-
alized, for the most part, is important to the discussion in this chapter not
only to highlight the differences that exist in how income is defined, but
also because major household surveys—including some that we discuss in
Chapter 5—sometimes refer their respondents to their tax returns when col-
lecting data on income. Tax-based concepts of income have become more
relevant to medical expenditures with the passage of the Affordable Care
Act, which imposes a uniform income concept defined in the tax code for
determining eligibility for Medicaid, the Children’s Health Insurance Pro-
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CONCEPTS OF RESOURCES 57
gram, and the new health insurance premium tax credits and cost-sharing
reductions created under the law.
AGI, which is calculated on the front page of IRS Form 1040, is the
amount of the taxpayer’s income that is subject to tax. Exemptions and
deductions are subtracted from AGI to determine taxable income. Although
there is substantial overlap between Census money income and AGI, AGI
excludes some sources that are included in Census money income, excludes
portions of other sources that are in Census money income, and includes
some additional sources that are not included in Census money income.
The following sources, which are included in Census money income
(although not necessarily well reported by survey respondents), are not tax-
able and therefore are excluded from AGI (Henry and Day, 2005):
• Interest and dividends on funds held in tax-deferred retirement
accounts—these become taxable only when funds are withdrawn;
• Tax-exempt interest from state and municipal bonds;
• Workers’ compensation;
• Veterans’ benefits;
• Benefits from private disability insurance if the premiums were paid
by the taxpayer;
• Public assistance and Supplemental Security Income;
• Child support;
• Assistance from friends and relatives; and
• Educational assistance used for tuition and books (i.e., educational
expenses).
Of these, only tax-exempt interest is even reported on the tax return,
and it appears on a separate line rather than as part of a total interest
amount. If a survey questionnaire follows the tax return, then it would have
to include separate questions to capture these several sources.
Moreover, the two largest components of Census money income—
wage and salary income and Social Security benefits—are not fully taxable
for most people and therefore may not be fully included in AGI. Taxable
wage and salary income excludes pretax deductions for a variety of special
purposes, which have been growing in type and total value. These include
• Contributions to a 401(k) or similar plan, which can be as high
as 12 percent of gross earnings for workers who are not nearing
retirement and higher for older workers, who are allowed to make
contributions above 12 percent if they set aside less than the maxi-
mum amount in earlier years;
• Funds set aside for health care flexible spending accounts (up to
$5,000 annually through 2012 and dropping to $2,500 thereafter);
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58 MEDICAL CARE ECONOMIC RISK
• Funds set aside for dependent care (up to $5,000 annually);
• Health insurance premiums paid by the employee (this can be well
above $10,000 annually for family coverage); and
• Transportation expenses (up to $125 monthly for transit fares as
of 2012 and even more for parking).
Amounts excluded as pretax deductions are not reported on the tax
return, so a survey questionnaire that asks respondents to report amounts
from their tax returns will exclude these amounts from wage and salary
income unless they are collected separately. These exclusions can add up to
a sizable fraction of gross income over much of the earnings distribution,
although there is age variation in the use of these different deductions.
Younger families are more likely to use the dependent care deduction,
whereas older families and individuals are more likely to set aside large
amounts for flexible spending.
Social Security benefits may be wholly or partially excluded from taxa-
tion, depending on the total amount of the benefits and the taxpayer’s other
income.3 Unlike other nontaxable income or the nontaxable portion of
wage and salary income, all Social Security benefits must be reported on the
tax return so that the nontaxable portion can be calculated. A survey ques-
tionnaire that asks respondents to report their Social Security benefits could
request either the total or taxable amount (or both). If the questionnaire is
not explicit about which one should be reported, a respondent could report
either the total or taxable benefits, and which one was reported might not
be evident from the response.
AGI also includes sources that are not included in Census money in-
come. AGI includes capital gains except for the one-time exclusion of gains
from the sale of a principal residence and the exclusion of capital gains that
occur within a tax-deferred retirement account until they are withdrawn
from the account. AGI also includes state income tax refunds received in
the prior year, gambling winnings, and all withdrawals from retirement
plans—not just regular withdrawals—except when such withdrawals are
rolled over into another tax-deferred plan.
Consumption-Based Resource Measures
A number of economists argue that for the purpose of measuring the
adequacy of resources for people at low-income levels, a measure based on
consumption is more appropriate than a measure based on income (see,
for example, Meyer and Sullivan, 2003). Income, it is said, understates
3
Railroad Retirement benefits are treated the same way, but we focus on Social Security
benefits because they cover far more people.
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CONCEPTS OF RESOURCES 59
well-being to a greater extent than consumption. This may be more a mea-
surement issue than a conceptual one. That is, consumption tends to be
reported more accurately than income among those with low income. At
higher income levels, the reverse may be true. In addition, at higher income
levels, people consume less of their income, so consumption will tend to
understate well-being.
For the measurement of MCER, consumption-based measures are
problematic, as MCER represents the likelihood of incurring medical con-
sumption beyond what a family or individual can afford. If one includes
out-of-pocket medical expenditures in the measure of resources, then such
expenditures become affordable by definition. Another, more general issue
with consumption-based measures of resources became evident in hindsight
in the lead-up to the global recession beginning in 2008. Spending beyond
one’s apparent means (one’s income) may indicate a risk of defaulting on
future obligations—creating exactly the situation that MCER is intended
to quantify. But consumption-based measures do have merit in pointing
out that families that are consistently able to spend more than they take in
as measured income are tapping into additional resources that are readily
available. At a minimum, this should lead us to consider more directly the
role of assets as resources.
ROLE OF ASSETS IN MEETING FINANCIAL NEEDS
In the context of how people pay for extraordinary and, especially,
unexpected expenses, the role of assets cannot be overlooked. Assets accu-
mulate over a lifetime. Under models of life-cycle saving, people accumulate
savings (including funds held in retirement accounts) during their working
years and then draw on these savings in retirement. Savings, together with
Social Security and pensions, replace the earnings forgone in retirement.
A number of researchers have used data from the Health and Retirement
Study to explore the relationship between health and the accumulation of
assets. Several studies focused on expenditures in the last year of life, most
recently Marshall, McGarry, and Skinner (2010). Others have looked at a
broader span of years. Coile and Milligan (2009) examined the response
of asset holdings to acute health events and new diagnoses. De Nardi,
French, and Jones (2010) investigated savings behavior as a response to
potential medical costs. More recently, Poterba, Venti, and Wise (2010) as-
sessed the relationship between health and asset accumulation among the
elderly and near-elderly. Using an index of health status constructed from
a combination of self-reports, diagnoses, and activities of daily living, they
found positive relationships between health and asset accumulation, which
imply that poor health reduces asset accumulation. These last findings are
of particular interest because they suggest that individuals with poor health
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60 MEDICAL CARE ECONOMIC RISK
not only face greater prospects of high medical expenditures in the future,
but also will be less well prepared to finance such costs.
Using data from the Medical Expenditure Panel Survey (MEPS), Banthin
and Bernard (in Part III of this volume) compared the distribution of net
assets by relative income of the elderly and the nonelderly in 2006, 2007,
and 2008 (pooling the 3 years to increase sample sizes for key subgroups).
The poor and low-income elderly had substantially more assets than the
nonelderly, and in the upper deciles of the asset distribution, these assets
became substantial. MEPS understates net assets relative to the Survey of
Consumer Finances—a survey focused on the measurement of wealth—so
it is possible that sizable assets extend even lower in the wealth distribution
than these findings suggest.
To exclude assets entirely from the resources used to measure MCER,
and in so doing make this a measure of income-related economic risk, ig-
nores accumulating evidence on how families prepare for potentially high
medical expenditures and how well they are able to absorb them. Unlike the
measurement of income poverty, which compares a family’s income with a
poverty threshold representing minimally sufficient expenses defined over
a broad class of families, our proposed measure of MCER is intended to
reflect the risk of incurring not only ordinary or expected expenses but also
extraordinary expenses that are specific to each family. To meet these ex-
penses without being pushed (further) into poverty, a family with sufficient
assets could elect to draw on these additional resources. If the goal of the
measure of MCER is to assess a family’s ability to pay for both expected
and unexpected medical care costs, then the resources component of that
measure must take account of at least a share of the assets that a family
could readily convert into income.
In expanding the definition of resources in this way, our goal is not
to provide an alternative measure of poverty, but to assess how large a
future medical expense (over the next calendar year) a family could absorb
without falling (deeper) into poverty. Resources counted under a measure
of MCER but not the SPM will not move a family out of poverty but
will reduce the risk that a family’s medical expenses could send the fam-
ily deeper into poverty. We note that with the SPM definition of income,
funds withdrawn from a retirement account to help cover medical or other
expenditures in the prior year could in fact show up as income (depending
on how the respondent interprets the questions on income from retirement
accounts). Our recommendation to include a portion of assets in the re-
sources used to measure MCER is loosely equivalent to applying this notion
prospectively. Instead of counting only assets that were in fact converted to
income (and from limited types of assets), however, our prospective mea-
sure of MCER would count assets that could be converted to income, and
from a potentially broader array of sources.
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CONCEPTS OF RESOURCES 61
What Assets Should Be Counted?
If assets are to be included as potential resources for assessing MCER,
then we must consider what assets should be counted and how these as-
sets should be included. In determining what assets should be counted in
resources, the panel considered the types of assets that families hold, the
access that they have to these assets, and whether assets should be included
in resources for the entire population or just a portion of the population.
Types of Assets
Assets are commonly divided into financial assets and property as-
sets. Financial assets include checking and savings accounts, certificates
of deposit, stocks and mutual funds, and a variety of retirement accounts,
which are primarily tax-advantaged. Property assets include homes, ve-
hicles, rental and other real property, and businesses. The net value of
property assets is the difference between what they would command if sold
and the amount of debt that is held (through mortgages and loans). Families
may have other liabilities in addition to those related to the purchase of
property. Such liabilities must be considered in assessing the amount of as-
sets available for the consumption of medical care. These include the tax li-
abilities that would be incurred in withdrawing funds from tax-advantaged
retirement accounts and from any other accounts for which withdrawals
would generate capital gains.
Access to Assets
A critical consideration in determining what types of assets to include
in resources and how much value to assign these assets is the extent to
which families have ready access to these assets. Financial assets are more
accessible, clearly, than property assets, but through home equity loans
and reverse mortgages, the elderly (and even younger persons) are able to
extract fungible resources from the equity that they have built up in their
homes. Assets held in tax-advantaged retirement accounts present unique
issues for access. First, there are age restrictions on who can withdraw
funds from these accounts without incurring significant financial penalties.
For example, 59-and-a-half is a critical age for withdrawing funds from
retirement accounts. Second, accounts held by employers may require sub-
stantial lead time to withdraw funds, making them effectively inaccessible
for meeting short-term needs. This is particularly true prior to age 59-
and-a-half, although much less of an issue after that age. Third, the taxes
that must be paid on funds withdrawn from tax-advantaged accounts of
any type (which are generally taxed as ordinary income) may not present
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62 MEDICAL CARE ECONOMIC RISK
an immediate issue for withdrawing funds, but they lower their effective
value.
Many of the surveys that could potentially support a measure of MCER
collect no asset data or limited types of asset data (see Chapter 5), so fine
distinctions among asset types may be of little use in the implementation
of a measure of MCER. With that in mind, the panel recommends that a
share of the value of financial assets held outside retirement accounts along
with the posttax value of assets held in retirement accounts be taken into
consideration as resources in measuring MCER (see “Conclusions and Rec-
ommendations” section). In principle, we would also include the amount
received from a reverse mortgage, and we would include it as income rather
than an asset, but we recognize the limitations of existing data.
Whose Assets?
For those who are still dependent on earnings to meet their basic needs,
having to dip into financial assets to cover a needed medical expenditure
may create a financial hardship down the road, due to a reduction in the
savings needed later in life. The panel considered whether to include assets
in the resources of persons at all ages or to do so only for persons who
were no longer working or who had reached an age at which most people
were not working. The availability of Medicare to those who reach age 65
changes the calculus for expected out-of-pocket expenditures for medical
care, which affects prospective MCER when sick. For this reason, the panel
thinks that MCER needs to be estimated separately for persons over and
under age 65.
People retire across a wide range of ages, however, and they accumulate
assets at widely varying rates. If assets were counted for all persons, regard-
less of employment or age, then the amount of assets accumulated—not
an arbitrary cutoff—would determine the amount of assets included in
resources. Other things being equal, retired persons and elderly persons
would tend to have more liquid assets than those who are still working
or who are not elderly, but the assets of younger persons or working per-
sons who have accumulated more than their peers would not be excluded.
Hence, although MCER needs to be estimated separately by age, the panel
thinks it is a more acceptable approach to take account of assets for people
of all ages and employment statuses in the estimation than counting or not
counting assets depending on age or employment. However, the restrictions
on access to funds held in retirement accounts prior to age 59-and-a-half
would have to be recognized—by either excluding such funds from liquid
assets below this age or discounting their value.
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CONCEPTS OF RESOURCES 63
How Much Asset Value Should Be Counted in Resources?
Treating a family’s entire pool of liquid assets (as the panel defines
them) as a resource that is available to offset a medical need is not a viable
option, because this approach does not address the long-term financial
hardship that would be created if a family consumed too large a share of its
assets on medical expenditures—or any other purpose—in a single year. But
if only a portion of a family’s accessible liquid assets can be counted toward
offsetting MCER, how should that portion be determined? We consider two
general approaches and their pros and cons.
Asset Share
If a family’s liquid assets grow at a rate of x percent per annum, on
average, a family can withdraw that fraction of its liquid assets each year—
minus any taxes owed on distributions from tax-advantaged accounts—
without consuming principal. Adding a uniform fraction of liquid assets
to income would provide a measure of resources that is consistent with a
family’s ability to spend without drawing down its assets at an unaccept-
able rate.
Banthin and Bernard (in Part III) added 5 percent of net assets to an-
nual income in order to assess the relative burden posed by family medical
expenses. Families were identified as having high burdens if their expendi-
tures exceeded a specified percentage (for example, 5, 10, or 20 percent) of
this adjusted family income. They performed the same calculation without
adding assets to income in order to assess how much the inclusion of as-
sets reduced the burden of medical expenses at different income levels. The
figure 5 percent was chosen as being “very close to what financial planners
advise” as a draw-down rate for families in retirement.
Annuitized Value
Pension actuaries have a widely accepted approach to converting a
lump sum amount into an annual payment. Commonly, the annual payment
grows at an assumed rate of inflation. Life expectancy, as reflected in age
and sex at a minimum, is the critical variable in determining the amount
of the annual payment, with an interest rate and an inflation rate being in-
cluded in the calculations as well. The actuarial approach is especially well
suited to assigning an income value to assets, and the key assumptions can
be based on those that are used in the annual reports of the Social Security
and Medicare trustees or those that are used by the IRS to calculate mini-
mum required distributions from IRAs (see, for example, Internal Revenue
Service, 2011). A critical difference between the actuarial approach and the
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64 MEDICAL CARE ECONOMIC RISK
first approach is that it allows the share of assets that would be added to
resources to grow with age (declining life expectancy). More importantly,
the methodology is well grounded in theory and well established in practice.
Pros and Cons
Defining the asset contribution to resources as a fixed percentage of as-
set value, rather than amount earned on assets during the most recent year,
would prevent a large decline in the value of assets from producing negative
family income. Likewise, calculating an annuitized value from the balance
of liquid assets would also avoid generating a negative contribution during
a year in which the value of asset holdings declined broadly. Furthermore,
the actuarial approach is consistent with established methods of converting
asset balances into income streams, which is exactly the need that we are
addressing, and the assumptions that it requires could be obtained from
those that are published each year by the Social Security and Medicare
trustees. The drawback of the second approach is its complexity, given the
limitations of the asset data to which it would be applied.
CONCLUSIONS AND RECOMMENDATIONS
The official poverty measure uses a concept of Census money income
in conjunction with a set of thresholds, originally developed as the cost of
a minimum diet times three for all other needs. A new supplemental pov-
erty measure uses a different concept of income that includes tax credits,
expenditures, and certain cash-equivalent benefits in conjunction with dif-
ferent thresholds. We have recommended (see Chapter 2) continuing the
Census approach for purposes of defining income and resources for the
SPM poverty measure, including recommended additional analysis related
to medical care economic burden.
A fundamental question for the panel is whether the resources used
to assess prospective MCER should be equated with either of these two
income concepts or whether a different concept would be more appropriate.
We find, first, that there is a growing deficiency in both income con-
cepts with respect to the treatment of retirement income, which is critical
to the measurement of resources for the elderly, which is the age group
with the greatest medical care needs. If resources are to be equated with
income, then at a minimum this deficiency must be addressed—down the
road if not in the near term. A deficiency with respect to the measurement
of self-employment income is also notable, and this affects the nonelderly
population.
We find, second, that for those who have access to them, assets are a
potentially important resource for meeting unexpected medical needs—
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CONCEPTS OF RESOURCES 65
particularly among the elderly, who may be depending in part on accu-
mulated assets to offset the loss of earnings in retirement. We recommend
that a portion of liquid assets be included in the resources of all persons,
regardless of age or employment status except where restrictions on ac-
cess may apply (as in retirement accounts). Although the panel finds the
calculation of an annuitized value from the family’s liquid assets a com-
pelling approach, we have not examined all the operational ramifications
of adopting it, and thus we defer to those who are charged to implement
a medical care economic risk measure. As to the choice between Census
money income and disposable income, we recommend the use of disposable
income, augmented by a portion of liquid assets, to facilitate comparisons
with the SPM.
Recommendation 3-1: The panel recommends that the U.S. Cen-
sus Bureau modify its concepts and measurement of money income
and disposable income to better account for income flows from self-
employment and from new forms of retirement income for use in mea-
sures of poverty and medical care economic risk and burden that are
derived from its household surveys.
Recommendation 3-2: The panel recommends that, for measuring med-
ical care economic risk, a portion of liquid assets be included in the
resources of all persons, regardless of age or employment status. Only
assets that the family or individual can access relatively quickly should
be considered in determining the amount to be included—namely,
financial assets held outside retirement accounts, the posttax value of
assets held in retirement accounts, and, in principle, the amount po-
tentially received from a reverse mortgage (treating it as income rather
than as an asset), acknowledging the limitations of existing data.
Recommendation 3-3: The panel recommends that the method for
calculating the share of liquid asset contribution to resources for mea-
suring medical care economic risk be determined by the federal agency
charged with producing the measures and that the methodology be
based on one of two options—either a fixed share of assets or an an-
nuitized value. The share of liquid asset contribution derived in this
manner should be added to disposable income to provide the measure
of resources for evaluating medical care economic risk.
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