NCPA - National Center for Policy Analysis


September 9, 2009

Common measures of economic inequality in America overlook several important considerations, including spending on health care, says Ron Haskins, a senior fellow for economic studies and co-director of the Center on Children and Families at the Brookings Institution, and a senior consultant at the Annie E. Casey Foundation.

According to the Brookings Institution's Gary Burtless and Pavel Svaton:

  • Medical spending as a share of personal income averaged across all Americans jumped from 7 percent in 1960 to 21 percent in 2007.
  • If medical care were paid for out of the pockets of health-care consumers, the huge growth in health spending would have little or no bearing on income inequality, since it would come out of personal income.
  • But about 75 percent of spending on health care comes from sources other than personal income, namely private insurance mostly paid for by employers and government payments made by Medicaid and Medicare.

In other words, one of the biggest single sources of consumer spending by families -- and one that is growing rapidly each year -- is ignored in most inequality calculations.  This approach to inequality is roughly equivalent to estimating the size of a city by counting the names in the phone book, but ignoring all names that begin with "R," "S," and "T," says Haskins.

What if we included spending on health care paid for by third parties in our inequality calculations?  Burtless and Svaton used data from the Medical Expenditure Panel Survey to explore this question:

  • Averaged over the 2001-2005 period, per-person spending on health care for those under age 65 in the bottom fifth of income was greater than per-person spending on health care for those in the second and middle fifths.
  • It was only slightly below spending by those in the two richest fifths.
  • For those over age 65, whose needs for health care are much greater than the needs of younger people, per-person spending was higher in the bottom fifth than in any other.

How is it possible that people with so little income could spend so much on health care? The answer, as we have seen, is that most of the payments for health care are made by third parties, says Haskins:

  • Indeed, people under age 65 in the bottom 10 percent of earners enjoyed third-party payments on health care equal to 65 percent of their income.
  • People in the second tenth enjoyed third-party payments equal to 21 percent of their income.
  • By contrast, people in the top two income tenths had third-party payments equal to 3 percent and 2 percent of their income, respectively.
  • For those over age 65, people in the bottom fifth enjoyed third-party payments equal to an amazing 130 percent of their income, while those in the top fifth enjoyed payments equal to only 6 percent of their income.

If the cost of health care paid for by third parties were included in the calculation of income, in percentage terms the incomes of families at the bottom of the distribution would get a much bigger boost than incomes at the top of the distribution. It follows that inequality would fall, says Haskins.

Source: Ron Haskins, "Getting Ahead in America," National Affairs, Issue No. 1, Fall 2009.

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