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Measuring Poverty: A New Approach (1995)

Chapter: A Comprehensive Single Index

« Previous: Adding Health Insurance Benefits to Income
Suggested Citation:"A Comprehensive Single Index." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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DEFINING RESOURCES 231 care induced by the availability of insurance coverage carried with it somewhat higher out-of-pocket spending.23 One can debate the extent to which the poverty thresholds should be raised to allow for the increase in the standard and costs of medical care that has occurred since the 1960s, just as one can debate the extent to which the thresholds should be raised to allow for increases in the overall standard of living. Some spending for medical care services is discretionary (see below), but to add the value of health insurance benefits to income (in whole or in part) but not to add any amount to the poverty thresholds—to allow either for medical care needs that would be covered by insurance or for higher out-of- pocket expenses—is to ignore completely the increased costs of medical care and to assume the fungibility of medical care benefits. This approach is perverse, particularly for people with high health care needs (who may also have above-average out-of-pocket costs). As we recommend above (Recommendation 4.1), poverty estimates of this type are not appropriate. A Comprehensive Single Index The treatment of medical care needs and resources in the poverty measure must be consistent for both the thresholds and the family resource definition. It must also be complete by taking account of total medical care needs, whether covered by insurance or paid for out of pocket. One option described by Moon (1993) that meets these criteria is to develop a comprehensive single index of poverty that includes both nonmedical and medical needs and resources. Under this approach, the thresholds would have an allowance for medical care spending covered by insurance and an allowance for out-of-pocket expenditures. Correspondingly, the value of each family's insurance coverage would be added to income up to the level of the budget allowance (i.e., there would be no value added for additional insurance coverage). Also, the amount of a family's out-of-pocket expenses that exceeded the average budget allowance would be subtracted from income; if a family had below-average out- of-pocket expenses, the difference would be added to income). Because of the great variability in medical care needs, Moon suggested separate thresholds by health care risk category on the basis of such characteristics as family size and health status, which could be proxied by age or measured directly.24 23 A study by the Office of Technology Assessment (1992) cautions that a causal relationship between health insurance coverage and increased use of medical care services is not established. However, the literature finds strong evidence of such a relationship (see, e.g., Hafner-Eaton, 1993; Hahn, 1994; Newhouse and The Insurance Experiment Group, 1993; Spillman, 1992; see also the review in Office of Technology Assessment, 1994). These findings support the expectation from economic theory that consumption of medical care, like other goods and services, is sensitive to relative prices (which are lowered by insurance coverage). 24 Wide variations in total medical care expenditures (covered by insurance and out of pocket) are evident in the 1987 NMES (see Lefkowitz and Monheit, 1991). Thus, people aged 65 and over with Medicare and some private insurance who were in fair or poor health had

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Each year's poverty figures are anxiously awaited by policymakers, analysts, and the media. Yet questions are increasing about the 30-year-old measure as social and economic conditions change.

In Measuring Poverty a distinguished panel provides policymakers with an up-to-date evaluation of

  • Concepts and procedures for deriving the poverty threshold, including adjustments for different family circumstances.
  • Definitions of family resources.
  • Procedures for annual updates of poverty measures.

The volume explores specific issues underlying the poverty measure, analyzes the likely effects of any changes on poverty rates, and discusses the impact on eligibility for public benefits. In supporting its recommendations the panel provides insightful recognition of the political and social dimensions of this key economic indicator.

Measuring Poverty will be important to government officials, policy analysts, statisticians, economists, researchers, and others involved in virtually all poverty and social welfare issues.

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