Appendix 3B

Examples of PPM versus SPM Treatment of Health Insurance and Medical Care

This Appendix provides simple examples to illustrate how the Principal Poverty Measure (PPM) and the Supplemental Poverty Measure (SPM) differ in their treatment of health insurance and medical care. Consider first individuals under the age of 65 who do not have Medicare (Example 1). These individuals may have employer-sponsored coverage, Medicaid, subsidized Marketplace coverage, unsubsidized Marketplace (or other nongroup) coverage, or they may be uninsured. In each example, the hypothetical values for total premiums and out-of-pocket spending for premiums and medical care are first introduced.

Panel 1A shows how individuals with each type of coverage would be treated under the SPM. None of the individuals have an addition to needs under the SPM. Actual out-of-pocket spending on premiums, which depends on insurance type, is subtracted from resources. Actual out-of-pocket spending on medical care, which is assumed in this example to be the same regardless of insurance type, is also subtracted from resources. Panel 1B shows how individuals with each type of coverage would be treated under the PPM.

Regardless of insurance type, the benchmark premium—here assumed to be $5,000—is added to needs. The net value of health insurance transfers is added to resources. This value depends on insurance type, as shown in Panel 1B. For individuals with employer-sponsored coverage or Medicaid, the net transfer value is calculated by subtracting the individual’s actual out-of-pocket spending on premiums from the benchmark premium; the amount subtracted is capped at the value of the benchmark premium so that the net transfer value will always be greater than or equal to zero. For individuals with a premium tax credit for Marketplace coverage, the net value of the health insurance transfer added to resources is the value of the tax credit. Individuals with unsubsidized private coverage or no coverage at all are not receiving a health insurance transfer, so nothing is added to their resources. Finally, actual nonpremium out-of-pocket spending on medical care (MOOP), which is assumed in this example to be the same regardless of insurance type, is also subtracted from resources for all individuals; this subtraction is capped at the out-of-pocket spending limit for the benchmark Silver Marketplace plan.

For most individuals with insurance benefits, the SPM and the PPM yield the same poverty status. This is because the inclusion of the benchmark premium in the PPM needs threshold is largely offset by the addition of health insurance transfers to resources. For individuals without health insurance benefits, however, more of these individuals will likely be counted as poor by the PPM than by the SPM, because the PPM needs threshold includes the benchmark premium, but there is no addition to resources. In addition, for individuals with all insurance types, the fact that the subtraction of MOOP spending from resources is capped under the PPM but not the SPM may result in some individuals with very high MOOP spending being classified as nonpoor under the PPM approach while they would have been classified as poor according to the SPM.

Example 2 illustrates how the SPM and the PPM treat Medicare beneficiaries. The SPM adds nothing to the threshold and deducts actual out-of-pocket spending on health insurance premiums and medical care from resources. The PPM, in contrast, adds an imputed Medicare premium to the need threshold. The value of the imputed premium is based on the average government outlays for Medicare Parts A, B, and D, plus the lowest out-of-pocket premium for a Medicare Advantage plan that includes prescription drug coverage (MAPD plan). This quantity is intended to reflect the average cost of a plan that provides a standard package of benefits. The PPM then adds to household resources the net value of the health insurance transfer from the government, calculated as the imputed Medicare premium minus the individual’s out-of-pocket premium for Part B. Finally, actual nonpremium MOOP spending is also subtracted from resources for all individuals. (In 2025, it will be possible to cap these subtractions according to changes passed in the Inflation Reduction Act. The Act limits the maximum out-of-pocket spending on prescription drugs in 2025 to $2,000, indexed to inflation. Thus, MAPD plans will have identifiable maximum out-of-pocket limits for medical care and prescription drug spending.)

Example 1: Single individual, age less than 65 and not Medicare eligible

Example 2: Single individual with Medicare based on age or disability