When does health insurance count as income?
The debate over growing income inequality in the United States often involves sometimes arcane decisions about what exactly constitutes income. One such instance involves government-provided health insurance. The non-partisan Congressional Budget Office in 2012 changed how it measured the value of government-provided insurance in order to be consistent in how they measure the value of insurance provided by employers and the government.. The very technical change, however, happens to have a significant effect on the trends in incomes for low-income households.
Prior to 2012, CBO valued Medicare, Medicaid and the Children’s Health Insurance Program based on how much money these health insurance programs freed up cash for the household. If a household has $5,000 left over after paying for housing and food, for example, then the fungible value of the health insurance is $5,000. The value to households could go up to the average cost of the program.
Starting in 2012, CBO changed the way they valued these programs. Instead of using the fungible value, they simply impute the average cost to every household that uses the program, regardless of income. This means any increase in the cost of the program—an increase in payments to doctors, for example—would register as an increase in household income.
Changing this definition has had a significant effect on the measured incomes of households that have government provided insurance, particularly low-income households. Using the 2011 definition, the average income for a household in the bottom 20 percent grew by 18 percent from 1979 to 2007. Using the new definition, the average income for the bottom fifth grew by 41 percent over that same period. (Note that the CBO made other changes in the data, including the price index used, but the health insurance change was the largest change.)
As health economist Uwe Reinhardt at Princeton University points out, CBO can’t be blamed for muddling through with these data issues. Economists really don’t have a consensus on how to measure the value of these programs. Clearly they need to think through this question deeper. The value of Medicare and Medicaid is just one example of the technical questions surrounding the definition of income. If we want to understand the causes and possible consequences of income inequality, we should make sure we can all agree on what constitutes income.