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Stagnant incomes and health care subsidies

January 23, 2020

Topics: Quote of the Day

By Isabel V. Sawhill and Christopher Pulliam
Brookings, January 21, 2020

The state of the American middle class is a hot topic on the campaign trail and in the policy community. As we have shown before, income growth for the middle class, defined as the middle 60 percent of the income distribution, is falling behind both the bottom and the top. Using the Congressional Budget Office’s measure of income after taxes and transfers, which takes into account market income, social insurance, federal taxes, and means-tested transfers, middle-class incomes have grown 47 percent from 1979 to 2016.

That growth pales in comparison to the top and the bottom. The top 20 percent has seen their incomes double. But much more surprisingly, the bottom 20 percent has seen income growth of 84 percent, far outpacing the middle class. Plus, these trends are predicted to continue.

Measuring income is a tricky business. A reasonable critique of this approach is the inclusion of the value of health insurance subsidies, especially for those at the bottom of the income distribution. The value of these insurance subsidies, and therefore the value added to a poor family’s income, has grown faster than other components of income over the past several decades. Some of that additional income bought better healthcare but some did not. More importantly, health insurance can’t be used to pay the rent or buy food, and many if not most of these low-income families would likely value this coverage at less than its high cost. Recognizing the problem, previously, CBO used the “fungible” value of Medicare, Medicaid, and CHIP, which values government insurance to the extent it frees up other income to spend outside of necessities. Then, starting in 2012, CBO began counting the full per capita cost to the government of providing that insurance as income.

This debate about how to count government subsidized health insurance in measures of income has not been fully resolved. Does giving low-income families access to healthcare really increase their income? Some argue yes. If the cost of that access is $7,000, and the family would otherwise have had to buy an insurance policy costing that much, then government provision is worth a lot. Moreover, those are real federal dollars funded by taxpayers and should be counted. Others argue that, in the absence of government provision, most of these families would never buy such an expensive insurance policy for the simple reason that they can’t afford it. They likely value other goods and services more, especially if they are relatively healthy and do not utilize the full value of government insurance.

While we will not solve that debate here, we do want to make a point about the role of healthcare in the CBO numbers. CBO includes three measures of healthcare income: Medicaid and CHIP, Medicare, and employer’s contributions to health insurance. Government subsidies for health insurance make up a large portion of the bottom quintile’s income growth over the past 40 years, largely due to Medicaid and CHIP as mentioned above. Excluding all government and employer health insurance subsidies, the bottom quintile’s income growth drops from 84 percent to 40 percent—a huge decrease.

However, excluding healthcare affects income growth throughout the income distribution. Without healthcare, middle class income growth decreases from 47 percent to 32 percent, a sizable decrease.

Regardless of your view on the healthcare question, income growth for the middle class is still falling behind both the rich and the poor. To be sure, the bottom quintile started from a much lower base in 1979. We are not suggesting that those at the bottom are doing just fine. However, we are arguing that the middle class has not seen strong income growth relative to other groups.



By Don McCanne, M.D.

In the past several decades, the increase in income and wealth due to gains in productivity have accrued primarily to the wealthy, leaving incomes relatively stagnant for four-fifths of our population, even though, as this article indicates, strictly as a percentage the income for the lowest quintile has increased significantly (keeping in mind that a large percentage of a small number is still a very modest amount).

Since health care has become very expensive, and since the government and employer increase in health care subsidies constitutes a form of income, what impact has this had on the inequities of income inequality? If health care subsidies were not included as income, the bottom quintile’s income growth over the past four decades drops from 84 percent to 40 percent, whereas middle class income growth decreases from 47 percent to 32 percent. This suggests that our current health care financing is somewhat progressive, though for the very wealthy, income gains have far more than offset increases health care costs – certainly a regressive trend. Because of the increase in health care costs and the stagnation of incomes for all but the top quintile, the current progressively of health care financing is still inadequate, not to mention that too many are left uninsured or underinsured.

The fact is that America’s working families are stressed because of flat wages and high health care costs. There are many remedies for this that should be implemented, but perhaps the most effective would be to enact single payer Medicare for All in which the universal risk pool is funded through equitable, progressive tax policies. All of us would receive the health care we need and each of us could afford it. In contrast, merely allowing uninsured individuals to purchase Medicare, even if partially subsidized, will have very little overall impact on health care justice. Even worse is to pretend that the market will work for people whose pockets are empty.

Setting aside the problem of financing health care for all of us would allow us to direct our attention to evaluating and implementing other beneficial policies that would bring us closer to the more egalitarian society that we all would like to be a part of (wouldn’t we?).

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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