Coping with health-care costs: implications for the measurement of catastrophic expenditures and poverty
A new paper came down the Health Economics RSS feed (what of it? I’m a Health Economist. It’s perfectly normal), by Gabriela Flores (not that one), Jaya Krishnakumar, Owen O’Donnell and Eddy van Doorslaer.
In the absence of formal health insurance, we argue that the strategies households adopt to finance health care have important implications for the measurement and interpretation of how health payments impact on consumption and poverty. Given data on source of finance, we propose to (a) approximate the relative impact of health payments on current consumption with a coping-adjusted health expenditure ratio, (b) uncover poverty that is hidden because total household expenditure is inflated by financial coping strategies and (c) identify poverty that is transient because necessary consumption is temporarily sacrificed to pay for health care.
Measures that ignore coping strategies not only overstate the risk to current consumption and exaggerate the scale of catastrophic payments but also overlook the long-run burden of health payments. Nationally representative data from India reveal that coping strategies finance as much as three-quarters of the cost of inpatient care. Payments for inpatient care exceed 10% of total household expenditure for around 30% of hospitalized households but less than 4% sacrifice more than 10% of current consumption to accommodate this spending.
Ignoring health payments leads to underestimate poverty by 7-8% points among hospitalized households; 80% of this adjustment is hidden poverty due to coping.
They present an argument in favour of distinguishing the different impacts of catastrophic health expenditures, defined thus (and using a rural household as exemplar):
“Coping” consist of non-income financing of health care: savings, borrowings, selling assets. Specifically such expenditures can generate transient poverty, for households that finance such costs using household income, as well as identifying hidden poverty, for households that finance such costs with coping strategies:
“Hidden poverty” is defined thus:
Households that are poor on the basis of their sustainable level of consumption are not recognized as poor by conventional measures because their use of savings, assets or borrowing to pay for large healthcare costs temporarily raises their total spending above the poverty threshold.
It is more of a welfare measure of the loss of household utility/welfare, created by having to finance catastrophic care using short-term sacrifices of wealth that leave the household vulnerable to future shocks.
“Transient poverty” is short-run household poverty that could be eliminated with insurance for catastrophic care (such that households did not need to pay Out-Of-Pocket): it is the (or a heretofore non-measured part of the) opportunity cost of not having such insurance.
Why the distinction?
In the context of low-income populations with limited formal health insurance coverage, this paper argues that the strategies households adopt to finance health care have important implications for both the measurement and the interpretation of how health payments impact on household consumption, welfare and poverty. Given the availability of cross-section data containing information on the means of financing health payments, we propose that the relative impact of those payments on consumption of other goods is best approximated by payments financed from income as a proportion of that income.
Measures based on the ratio of health payments to total household expenditure, which have been used previously, overestimate the risk to current consumption induced by health payments and so exaggerate the scale of catastrophic payments. Failure to take account of the extent to which health care is financed from running down savings, borrowing and depleting assets leads to the oversight of the long-run opportunity cost of health payments.
We show how information on the source of finance can be used to uncover poverty that is hidden by conventional measures because total household expenditure is inflated by payments for health care that are financed from coping strategies. We propose that the impact of health payments on transient poverty be approximated through assessing poverty on the basis of current income both gross and net of health payments financed from income alone.
The authors consider India. Given the nature of the appreciation in health care prices here in the US, it’d make for a great study for the opportunity cost to the US economy of not having such insurance across the board.