Economic Scene: Debating Real Value of Health Benefits in Poverty Calculations

In July, the Congressional Budget Office — the nonpartisan arbiter of the costs and consequences of government spending — decided that we had not been valuing these benefits enough. In a report on how income and taxes are distributed across the population, it decided, for the first time, to value health benefits provided by the government at every penny they cost.

The decision stoked a long-simmering debate about how much health care is really worth to poor families who may not have enough to eat. The reclassification of health benefits added $4,600 a year to households in the bottom fifth of income. It shrank the nation’s yawning income gap and muted the increase of inequality over the last three decades. And it changed the picture of what the government does for Americans.

The reasoning behind the budget office’s action seems to make lots of sense: the government spends almost $8,000 on the average Medicaid beneficiary and more than $12,000 for each person on Medicare. Why shouldn’t that count as income? Without it, the recipients could not afford an essential, lifesaving service. Moreover, the budget office considers Social Security benefits as income. And that’s the way it treats the health insurance provided by employers to their workers.

But not everyone thinks health care is worth that much. In particular, the Census Bureau does not include health care and other noncash benefits when computing the official poverty rate. Even its Supplemental Poverty Measure — which was created to capture noncash sources of income, as well as all the costs faced by the poor — sets the value of Medicare and Medicaid at zero.

That approach is not unreasonable, either. To paraphrase Timothy Smeeding, the director of the Institute for Research on Poverty at the University of Wisconsin-Madison: you can’t eat health care. Medicaid benefits are enough to lift many people out of poverty statistically even if they don’t have enough money to afford housing, utilities and food.

And the addition of those benefits could alter how we view our progress. From 2000 to 2010, government spending for each Medicare recipient rose by two-thirds after inflation. But those increases probably didn’t make seniors feel wealthier, especially since their out-of-pocket expenses for medical care rose, too.

For years, the Congressional Budget Office followed the general approach of the Census Bureau: health benefits were worth only the amount that a family otherwise would have spent on doctors and other medical services — that is, money that could be used on something else. So Medicare, Medicaid or Children’s Health Insurance Program benefits to a family that didn’t have enough money to satisfy necessities like food, shelter and utilities were valued at zero, because without the government benefits the family wouldn’t spend on medical care at all.

The change in approach alters the calculation of who is living in poverty. Including these health benefits at face value raises by 25 percent the income of households in the poorest fifth of the population, to $23,300 in 2009 from $18,900 under the previous calculation. This is more than three times the average income of the poorest fifth of households before federal taxes and government benefits kick in, which in 2009 was $7,600. The gains from the new calculations are enough to vault a family of two parents and two children over the Census Bureau’s official poverty line of $21,756 and to almost breach the supplemental measure’s threshold of $23,854.

Because two-thirds of Medicare funds and 83 percent of Medicaid funds are spent on the poorest 40 percent of the population, the shift also narrows the nation’s income gap. Under the budget office’s old method, the richest fifth of American households made more than nine times the incomes of the poorest fifth, after taxes and government benefits. Under the new method, the rich take home less than 7.5 times what the poor do.

The new definition of income removes many seniors from the poorest group of Americans, as they are big consumers of Medicare. And it pushes more working families to the bottom of the income scale.

Accounting for health care this way also changes the view of what government actually accomplishes. Social scientists have noted with some dismay that taxes and government transfer payments have become less effective over the last 30 years at narrowing the income gap in American society. But including health benefits changes the outcome significantly because health care is becoming a much bigger part of government spending.

Under the budget office’s old methods, taxes and government spending in 2007 narrowed the income gap by 17 percent, as measured by the Gini index, which ranges from 0 when everybody has the same income to 1 when one plutocrat hoards it all. Including all government health spending as income, the government reduced inequality by 21 percent.

E-mail: eporter@nytimes.com; Twitter: @portereduardo