This paper compares several methods of incorporating medical care needs into a revised poverty measure. All of our measures are based in part on the recommendations of a National Academy of Sciences (NAS) panel which addressed many aspects of improving the measurement of poverty. The NAS panel also recognized the necessity of accounting for medical care needs in their revised measure. Their proposed solution, however, was to deduct actual out of pocket medical care expenditures from family resources before evaluating where a family stands in relation to the poverty threshold. In the NAS method the poverty threshold is based on expenditures for food, clothing, shelter and utilities plus a little bit more for other personal items. Medical care, in the NAS recommendation, is not included in the list of items that define poverty thresholds.

In this paper we compare the NAS approach of deducting medical care expenses fromresources to an alternative approach of incorporating medical care expenses directly into poverty thresholds definitions. At the general computational level these measures are mathematically equivalent. If poverty determinations are made by comparing resources to a specified threshold, then deducting an amount of money from the right-hand (or resource) side of the equation is the same thing as adding it to the left-hand (or threshold) side of the equation. Depending on how they are implemented, however, the two approaches can be quite different from one another because of the highly skewed and unpredictable nature of medical care needs.