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Medical Expenditure Risk and Household Portfolio Choice

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  • Dana P. Goldman
  • Nicole Maestas
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    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. The authors measure exposure to medical expenditure risk by whether an individual is covered by supplemental insurance through Medigap, an employer, or a Medicare HMO. They account for the endogeneity of insurance choice by using county variation in Medigap prices and non-Medicare HMO market penetration. They 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. Their results point to an important link between the availability and pricing of health insurance and the financial behavior of the elderly.

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    File URL: http://www.rand.org/content/dam/rand/pubs/working_papers/2007/RAND_WR325-1.pdf
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    Bibliographic Info

    Paper provided by RAND Corporation Publications Department in its series Working Papers with number 325-1.

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    Length: 49 pages
    Date of creation: Feb 2007
    Date of revision:
    Handle: RePEc:ran:wpaper:325-1

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    Keywords: cost of medical care; managed care plans; health insurance;

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    1. Jay Bhattacharya & Dana Goldman & Neeraj Sood, 2002. "The Link Between Public and Private Insurance and HIV-Related Mortality," NBER Working Papers 9346, National Bureau of Economic Research, Inc.
    2. Christopher D. Carroll & Andrew A. Samwick, 1995. "How Important is Precautionary Saving?," NBER Working Papers 5194, National Bureau of Economic Research, Inc.
    3. Douglas W. Elmendorf & Miles S. Kimball, 1996. "Taxation of labor income and the demand for risky assets," Finance and Economics Discussion Series 96-32, Board of Governors of the Federal Reserve System (U.S.).
    4. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
    5. Edwards, Ryan D, 2008. "Health Risk and Portfolio Choice," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 472-485.
    6. Hochgürtel, S., 1997. "Precautionary Motives and Portfolio Decisions," Discussion Paper 1997-55, Tilburg University, Center for Economic Research.
    7. Card, David & Sullivan, Daniel G, 1988. "Measuring the Effect of Subsidized Training Programs on Movements in and out of Employment," Econometrica, Econometric Society, vol. 56(3), pages 497-530, May.
    8. James P. Smith, 2003. "Consequences and predictors of new health events," IFS Working Papers W03/22, Institute for Fiscal Studies.
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