Out-of-Pocket Health Spending and Income Inequality in the United States: Threshold Effects and Structural Change

Selin Ozdamar

No 2026/0437, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: Income inequality across US states has risen to historic highs, and the channels driving it remain incompletely understood. This paper examines a channel that has received limited empirical attention: the financing of health care through out-of-pocket (OOP) payments. Using a balanced panel of 51 US states over 2004–2019, we apply the Hansen (1999) fixed-effect panel threshold model with OOP burden measured relative to household capacity to pay (CTP) and ask whether the relationship between OOP burden and inequality is regime-dependent. We document two findings. First, the marginal inequality effect of OOP burden on Gini-measured income inequality exhibits a statistically significant regime shift at 11.84% of CTP, a level well below the conventional 40% catastrophic-spending threshold, with an effect approximately 17% larger above this level than below. Second, the strength of this channel has not been stable over time: the marginal inequality effect of OOP burden fell by roughly half around 2009, a shift that appears under both burden measures and is better characterized as a discrete break than a gradual decline. We find no additional shift at the 2014 implementation of the Affordable Care Act and no differential decline in Medicaid-expansion states, indicating that the weakening of the channel predates the ACA. These results indicate that the distributional consequences of OOP financing begin to intensify well below the threshold that is defined as catastrophic in the literature and that the channel is time-varying in ways that existing policy-attribution narratives do not capture.

Keywords: out-of-pocket health spending; income inequality; panel threshold model; catastrophic health expenditure; capacity to pay; Affordable Care Act. (search for similar items in EconPapers)
JEL-codes: D63 H51 I13 I14 (search for similar items in EconPapers)
Date: 2026-10
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