Medical Expenditure Risk and Household Portfolio Choice

Published in: Journal of Applied Econometrics, v. 28, no. 4, June/July 2013, p. 527-550

Posted on on January 01, 2012

by Dana P. Goldman, Nicole Maestas

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Medical expenses are an increasingly important contributor to household financial risk. We examine the effect of medical expenditure risk on the willingness of Medicare beneficiaries to hold risky assets. Using a discrete-factor maximum likelihood method to address the endogeneity of insurance choices, we find that having a moderately protective Medigap or employer supplemental policy increases risky asset holding by 7.1 percentage points relative to those without supplemental coverage, while participation in a highly protective Medicare health maintenance organization increases risky asset holding by 13.0 percentage points. Our results highlight an important link between the availability of health insurance and financial behavior.

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