How much is health care worth to the poor?

In my very first Inequalities blog post I considered the argument that the United States has a more generous safety net for the poor than conventional comparisons with European states would suggest because we spend so much on public health care programs for the poor, elderly, and disabled. Subsequently, I reviewed work by Richard Burkhauser and others that suggests that accounting for health care benefits to low-income households substantially reduces the estimated rise in income inequality over time.

The New York Times has an interesting piece weighing the arguments for and against counting health care benefits in our poverty statistics. Right now the monetary value of government health programs are not counted as income in the official poverty statistic (which also does not count food stamps or any other non-cash benefits) and they are not included in the Census Bureau’s supplemental poverty measure. Now, however, the Congressional Budget Office is including health care benefits at their full dollar amount in their estimates of taxes and spending.

This may seem like so much bean counting, but it’s not. There are tricky conceptual questions here and lots of moving pieces – over time several things have been happening simultaneously. The price of health care for everyone has been rising much faster than inflation, the quality of health care has also been increasing (because we have more surgeries, drugs, and therapies then in the 1960s when Medicaid was enacted), and the social safety net has mainly been declining in other areas benefiting those at the very bottom of the income distribution. The net effect is that government health care looks much more generous for the poor in absolute and in relative terms.

All that said, health care may not, on average, be valued by poor households nearly as much as it costs for the government to provide it to them. As Tim Smeeding says in the article, “you can’t eat health care.” For families that need money for housing, food, and utilities, cash or food stamps may be much more valuable than health insurance (which they may not choose to use at a particular point in time). On the other hand, as some health economists like Jon Gruber point out, the security provided by health insurance benefits may be much more valuable to the poor than what the government pays for them. Having the security of health insurance protects people from very catastrophic and totally unaffordable expenditures that would otherwise lead to death and irreversible disability. Even when these benefits are not used, people gain peace of mind from knowing they are protected.

How can we get to the bottom of this? I have two suggestions. First, we need to get better at measuring the value of health insurance from the perspective of low-income families. The first promising route is to take advantage of real world scenarios in which households are offered the choice between taking health care benefits or taking cash instead. To some extent, we can observe this in the labor market when individuals are faced with the choice between taking job A, which provides higher wages but no health insurance benefits, and job B, which provides lower wages but includes health insurance benefits. This “wage-fringe tradeoff” provides insights into how much money people are willing to give up in order to get benefits. The wrinkle in the United States is that employers have a greater incentive to offer health insurance benefits, because those benefits are not taxed (unlike wages). This matters less for low-income families, because they generally pay little if any income taxes. Still, we see that some low-income workers gravitate to jobs where they can get health insurance benefits, and these workers tend to be older and less healthy. To deal with this selection issue, we could focus on mandated coverage benefits as a natural experiment (for example, national health reform includes such a mandate on employers), and observe how much wages shift in response to mandated coverage.

Second, once we have a credible estimate of how much low-income workers, on average, are willing to trade in income for health insurance benefits, we need a framework for incorporating this valuation into policymaking. This is trickier than it seems. There is likely to be a very wide range in how much these benefits are valued among low-income families, and setting the valuation at the average could have the effect of majorly discounting the value of benefits to very sick low-income individuals. There are also issues related to myopia: some people may not value benefits enough, because they are misinformed about their objective risk of getting sick and requiring medical attention. Still, gaining a better understanding of what health care is worth to the poor relative to other things that the welfare state could be doing to improve their lives could help to shape public priorities: as a society we might decide to trade in a little bit of health for a lot more wealth.

 

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About Brendan Saloner

I am a postdoctoral fellow at the University of Pennsylvania in the Robert Wood Johnson Health and Society Scholars Program. I completed a PhD in health policy at Harvard in 2012. My current research focuses on children's health, public programs, racial/ethnic disparities, and mental health. I am also interested in justice and health care.
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4 Responses to How much is health care worth to the poor?

  1. Brad F says:

    “To deal with this selection issue, we could focus on mandated coverage benefits as a natural experiment (for example, national health reform includes such a mandate on employers), and observe how much wages shift in response to mandated coverage.”

    Brendan
    I am not following you here. With credible coverage, under the ACA, workers will not have the option to receive cash in return if they defer health benefits. They will pay a penalty. In the event they dont receive credible coverage–companies are under no obligation to increase their wage. They pay the penalty.

    How does the experiment play out?
    Brad

  2. Thanks Brad. I guess I had something like this in mind: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2025309 but in that study the authors did not separately break out poor households (because they didn’t have the statistical power to do so). When employers increase coverage in response to a mandate, it will tend to lower worker wages. Although this results in some welfare loss for workers, there is an offsetting gain in welfare from access to health insurance. People’s decisions about participating in the labor market, and the wages that they accept after a mandate, should reveal something about how much they value health insurance compared to dollars.

    The experiment should also work in reverse for folks getting subsidized coverage through the exchanges or Medicaid — there will be some “crowd out” because they will drop employer based insurance, but at the same time their wages should go up to the extent that their employers are no longer covering that fringe benefit. Again, we can look at the shift in income as reflecting something about how valuable it was to workers to get compensation in the form of health benefits.

    Feel free to follow-up, I’m still thinking this all through.

  3. Brad F says:

    The problem I see is the study you cite is, a) a model, and b) the ACA is rigid and wont let workers choose between compensation and a higher wage. If firms drop coverage, the decision is unilateral; the worker may get a higher salary, however their values, as opposed to those of the company, are secondary. The transition is hard to untangle.

  4. Pingback: Adding Health Care Spending to the Poverty Equation | Inequalities

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