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SUMMARY

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. Copyright © 2012 John Wiley & Sons, Ltd.