National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: A Two-Index Poverty Measure

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Suggested Citation:"A Two-Index Poverty Measure." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 232
Suggested Citation:"A Two-Index Poverty Measure." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
×
Page 233
Suggested Citation:"A Two-Index Poverty Measure." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
×
Page 234

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DEFINING RESOURCES 232 This option is consistent and complete, but it has many practical difficulties. On the threshold side, the problem is the necessity to develop a large number of different thresholds, which greatly complicates the poverty measure and distorts comparisons of the ability of different types of families to meet their basic (nonmedical) needs in terms of income-to-poverty ratios (welfare ratios). For each of the various thresholds, it must be decided how large or small to make the allowance for medical care needs. On the resource side, there are problems with both the out-of-pocket and the insurance components. Some out-of-pocket expenditures are discretionary (e.g., elective cosmetic surgery) or incurred for services that are not strictly needed to treat a physical health problem (e.g., extra laboratory tests or ineffective drugs). To subtract such expenses from income could make people look poor when, in fact, the medical expenses were optional. Unfortunately, there are no data available with which to determine the proportion of out-of- pocket medical care expenses that could be termed discretionary or unnecessary, whether on an average basis or for people in particular health care risk categories (e.g., there are no data to determine the proportion of spending on cosmetic surgery that is in fact elective and not needed for physical health reasons). It seems unlikely that people would choose to pay for discretionary medical care expenses that moved them below the poverty line, but it could happen in some instances.25 With regard to the insurance component, there is the problem that people who lack insurance or have inadequate insurance but who either are not sick during the year or who receive uncompensated care could look poor when they are not. This result could come about because such people would have no or an insufficient insurance value added to their income to offset their insurance ''needs" on the budget side. It is true that people lacking adequate insurance are more at risk than other people, but depending on their actual health experience during the year, they may not actually be poorer than other people.26 A Two-Index Poverty Measure To try to overcome some of the complexities of combining nonmedical and medical care needs and resources in a single poverty measure, some researchers have suggested a two-index approach average expenditures of $6,459, compared with $2,575 for those in excellent or good health. For people under age 65 with some private insurance who were in fair or poor health, average expenditures were $3,152, compared with $1,047 for those in good health. 25 Discretionary and unneeded medical care expenses would likely pose more of a problem for measuring the distribution of disposable income and income-to-poverty ratios across the entire population. 26 It is one of the healthier age groups—people aged 18-24—who are most apt to report that they lacked health insurance coverage at any time during the year: 29 percent did so in 1992 compared with 15 percent of all people (Bureau of the Census, 1993b: Table 24).

DEFINING RESOURCES 233 Moon (1993) represents the first attempt to flesh out how such a measure might be implemented. As developed by Moon, a two-index poverty measure would have a nonmedical needs threshold that would be compared with income minus actual out-of-pocket medical care expenditures. It would also have a medical needs threshold that would represent the value of a basic insurance package with no deductible or copayment provisions. This threshold would be compared with the value of a family's insurance package: if the package is insufficient because it requires out-of-pocket payments (e.g., for deductibles or premiums), the family's income (before subtracting actual out-of-pocket payments) would be compared with the nonmedical needs poverty threshold to see if enough additional income is available to cover the required expenses. If a family lacked health insurance coverage, its income would be evaluated to determine if the family could afford to buy a complete insurance package. People would be classified as poor if their family fell below either one or both of the nonmedical and medical needs thresholds. Moon identifies many problems with trying to implement the medical component of a two-index measure. On the threshold side, it would be necessary to specify and price out a basic insurance package, something that would involve considerable judgement. Indeed, Moon suggests that a preferable procedure might be to use estimates of medical care expenditures for people covered by insurance, from such sources as the NMES, perhaps adding a factor to account for insurers' administrative costs. Another problem on the threshold side is that it would not suffice to have a single insurance package (or estimate of expenditures) as the standard: rather, multiple standards would be needed for different size families and for people in different health status categories (perhaps proxied by age). Finally, there would be a need to reprice the various insurance packages (or obtain updated expenditure estimates) at frequent intervals to keep pace with changes in the health care system and the implementation of any changes in the system. On the resource side, there are many operational problems. Thus, it would be necessary to determine for each family: • part-year versus full-year coverage. For example, families with Medicaid coverage beginning halfway through the year, after having to spend down their income, should not be assigned the same Medicaid value as families covered all year. • coverage of family members. Some members may have more complete coverage than others. • benefits provided by private insurance. Compared with the plan that is costed out for the thresholds, some actual plans might be more generous than needed for some services and not generous enough for others (i.e., there is a problem of fungibility among types of medical care benefits). Data would need to be obtained on plan benefits and also on the copayment requirements for the private insurance plan(s) held by families.

DEFINING RESOURCES 234 • the status of families without insurance. It would be hard to set an income cutoff to use to determine if families without insurance could afford it if they chose, because—unless the health care system is changed—insurance may not be available at any price to some people. The advantage of a two-index approach is that it provides a clean measure of nonmedical resources assessed against nonmedical needs and then explicitly measures risk with regard to adequacy of insurance coverage (or ability to purchase such coverage and also pay required out-of-pocket expenses). However, the difficulties in defining the basic insurance package, keeping it up to date with changes in the health care system, and obtaining the necessary information each year on families' actual insurance coverage appear to be overwhelming. Also, there is a fundamental asymmetry in the concept that underlies a two- index approach. It appropriately treats people with adequate (or more-than- adequate) insurance, in that it compares their insurance coverage with an insurance standard rather than adding insurance benefits to income and assuming that those benefits can be used for nonmedical needs. (This is the big problem in the work to date by the Census Bureau and others on valuing medical care benefits.) It also properly categorizes people with inadequate or no insurance coverage as medically at risk. However, it seems inconsistent to require that the poverty count include people who are medically at risk even though they have adequate income to meet their nonmedical needs. Some people who are medically at risk will indeed incur high out-of-pocket medical care expenses that will make them poor on the nonmedical side, but others will be healthy all year (or will have received uncompensated care) and hence will not necessarily be poor on the nonmedical side. To call such people poor because they had a high risk that never materialized seems illogical. Indeed, work by Doyle, Beauregard, and Lamas (1993: Table 1a) with data from the 1987 NMES indicate that a two-index measure could increase the poverty rate by 8 to 9 percentage points (60%) overall and by larger percentages for young adults and workers, even though many of these people had adequate income for their nonmedical needs.27 In sum, we conclude that there is a fundamental problem with trying to combine nonmedical and medical care needs and resources in a poverty measure: namely, that the two components are essentially measuring different things. The nonmedical component is assessing on a retrospective basis each family's actual ability to meet its needs during that year for such goods as food 27 Doyle, Beauregard, and Lamas (1993) estimate poverty rates from the 1987 NMES for the following: the current measure; a measure that subtracts average out-of-pocket medical care costs from the thresholds and subtracts both taxes and actual out-of-pocket medical expenses from gross income; a single-index comprehensive measure; and two variations of a two-index measure. See Chapter 5 for an estimate of the effect on poverty rates of the proposed measure.

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Measuring Poverty: A New Approach Get This Book
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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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