Health Care and Income Inequality

Gary Burtless and Pavel Svanton of Brookings add to the pile of reasons income inequality statistics are misleading. Here’s the abstract to their paper “Health Care, Health Insurance, and the Relative Income of the Elderly and Nonelderly“:

Cash income offers an incomplete picture of the resources available to finance household consumption. Most American families are covered by an insurance plan that pays for some or all of the health care they consume. Only a comparatively small percentage of families pay for the full cost of this insurance out of their cash incomes. As health care has claimed a growing share of consumption, the percentage of care that is financed out of household incomes has declined. Because health care consumption is more important for some groups in the population than others, the growth in spending and changes in the payment system for medical care have reduced the value of standard income measures for assessing relative incomes across age groups and across the income distribution. More than a seventh of total personal consumption now consists of health care that is purchased with government insurance and employer contributions to employee health plans. In this paper we combine health care spending and insurance reimbursement data in the Medical Expenditure Panel Study with cash and noncash income data in the Current Population Survey to assess the impact of health insurance on the distribution of income and, in particular, on the age profile of income. Our estimates imply that gross money income and disposable cash and near-cash income significantly understate the resources available to finance household purchases. The estimates imply that a more complete measure of resources would show less inequality than the income measures that are currently used. The addition of estimates of the value of health insurance to countable incomes reduces measured inequality in the population and the income gap between young and old. Standard income measures imply that households with an aged household head have significantly lower average and median incomes than households with a head who is less than 55. In contrast, an income definition that includes the value of health insurance implies that aged households have higher incomes than households with a nonaged head. [Emphasis added.]

HT: Peter VanDoren

Author: Will Wilkinson

Vice President for Research at the Niskanen Center

8 thoughts

  1. “As health care has claimed a growing share of consumption, the percentage of care that is financed out of household incomes has declined.”I'd really like to see the source for this stat. Sounds removed from the reality I see people struggling with in my neck of the woods. Especially after Bush's push for “consumer driven health care” and employers' passing on more health care expenses to employees.

  2. What is the point of talking about inequality if you don't know whether it's a good or bad thing, or, if good, how much of it is good?

  3. Thanks Stephen for the link.However, in that the amount paid by the employer is now being considered as an employee's “income” which could be taxed (depending on what happens with health care reform) does this chart still hold? (Doesn't seem like it, in that the chart shows the consumer's out-of-pocket expenses, not total cost.)The employer provided health care payments are being held as a reason why wages have remained stagnant over time – health premiums are taking a bigger chunk out of the cost per employee, so less gets funneled as salary, which is certainly a cost to the consumer.

  4. AnneYou are definitely right about the ambiguity. I can't tell exactly what they meant by “financed out of household income”. Are they referring to people whipping out the credit card or dipping into personal savings, or are they including premiums and medicare/medicaid payments in the income definition? I took it to mean the former and you are making a good case for the latter, in which case it it does seem like a hard circle to square.I should say however, if I remember correctly, the inequality calculation does not include tax transfers, which would definitely include Medicare and Medicaid which accounts for about %50 of all health care spending. I have no idea, though, if employer paid premiums are included. Either way your point is well taken.

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