Medical Expenditure Risk and Household Portfolio Choice

Dana Goldman and Nicole Maestas

No 11818, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: As health care costs continue to rise, medical expenses have become an increasingly important contributor to financial risk. Economic theory suggests that when background risk rises, individuals will reduce their exposure to other risks. This paper presents a test of this theory by examining the effect of medical expenditure risk on the willingness of elderly Medicare beneficiaries to hold risky assets. We measure exposure to medical expenditure risk by whether an individual is covered by supplemental insurance through Medigap, an employer, or a Medicare HMO. We account for the endogeneity of insurance choice by using county variation in Medigap prices and non-Medicare HMO market penetration. We find that having Medigap or an employer policy increases risky asset holding by 6 percentage points relative to those enrolled in only Medicare Parts A and B. HMO participation increases risky asset holding by 12 percentage points. Given that just 50 percent of our sample holds risky assets, these are economically sizable effects. It also suggests an important link between the availability and pricing of health insurance and the financial behavior of the elderly.

JEL-codes: I0 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-hea and nep-ias
Note: AG EH
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Citations: View citations in EconPapers (7)

Published as Dana Goldman & Nicole Maestas, 2013. "Medical Expenditure Risk And Household Portfolio Choice," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(4), pages 527-550, 06.

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Working Paper: Medical Expenditure Risk and Household Portfolio Choice (2007)
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