Working Paper: NBER ID: w11818
Authors: Dana Goldman; Nicole Maestas
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.
Keywords: medical expenditure; household portfolio choice; Medicare; risk aversion
JEL Codes: I0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Medigap or employer supplemental insurance (I13) | holding risky assets (G19) |
| Medicare HMOs (I13) | holding risky assets (G19) |
| Medigap or employer supplemental insurance (I13) | insurance choice (G52) |
| insurance choice (G52) | holding risky assets (G19) |