Medical Expenditure Risk and Household Portfolio Choice

46 Pages Posted: 19 Feb 2006 Last revised: 13 Jun 2009

See all articles by Dana P. Goldman

Dana P. Goldman

RAND Corporation; National Bureau of Economic Research (NBER)

Nicole Maestas

Harvard Medical School - Department of Health Care Policy

Multiple version iconThere are 2 versions of this paper

Date Written: December 2005

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.

Suggested Citation

Goldman, Dana P. and Maestas, Nicole, Medical Expenditure Risk and Household Portfolio Choice (December 2005). NBER Working Paper No. w11818. Available at SSRN: https://ssrn.com/abstract=875694

Dana P. Goldman (Contact Author)

RAND Corporation ( email )

P.O. Box 2138
Santa Monica, CA 90407-2138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nicole Maestas

Harvard Medical School - Department of Health Care Policy ( email )

180 Longwood Avenue
Boston, MA 02115
United States

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