Benefit Incidence of Public Health Care Spending in the United States

The United States has a complex health care system comprising multiple public programs for providing, financing, and/or subsidizing health care. Two of the largest public programs are Medicare (a federal program for nearly all residents age 65 and over) and Medicaid (a combined federal/state program targeting recipients by need and age). A third major public subsidy - one that is only just smaller than either Medicare or Medicaid - is the income tax exemption for employment-related health insurance. This subsidy disproportionately benefits middle and upper income families, and especially families of workers at large private and public establishments. Combining these and a variety of smaller programs, public health care spending in the U.S. in 2006 is projected to exceed $1.2 trillion. Despite the remarkable magnitude of this amount, there has been no systematic effort (since some incomplete efforts in the 1970s) to explore the incidence of public spending on health care in the U.S. across various socioeconomic subgroups of the population. What is the distribution of public spending by age group and by income deciles? How are expenditures distributed by race and ethnicity, family structure, immigration status, region, and medical condition? Our paper seeks to provide a first look at the benefit incidence of U.S. public health spending. Selden and Wasylenko (World Bank, 1990) present a primer that delineates the many forms of benefit incidence analysis. They group benefit incidence studies into three categories. The first uses ad hoc assumptions regarding the incidence of particular programs, typically in an effort to gain a rough overview the entire public budget. The second approach - followed in this paper - combines aggregate information about program spending with household-level data on program participation and use to allocate expenditures to subgroups of the population. Benefit incidence analysis of this sort is a frequently-used tool in developing economies for tracking public spending effort within populations, and this approach can be readily applied to the U.S. The third approach involves a more ambitious effort to allocate benefits according to compensating variations - necessitating structural estimates of the demand for public services. Our analysis relies primarily on household participation data from the Medical Expenditure Panel Survey (MEPS), an annual survey of roughly 30,000 persons. MEPS supports nationally-representative estimates of insurance coverage and medical care expenditures by source of payment. We combine these data with aggregate spending estimates by type of service and source of payment in the National Health Expenditure Accounts (NHEA), building on the detailed MEPS-NHEA reconciliation in Sing, Banthin, Selden, et al. (Health Care Financing Review, 2006). Other data include tax simulations from the National Bureau of Economic Research and premiums for employer-sponsored coverage from the MEPS survey of establishments. Preliminary research suggests that public spending is somewhat less pro-poor than is commonly believed; however, incidence by income level is only one of the many dimensions of incidence that we hope to present at Copenhagen.