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Medicare Part D and Portfolio Choice
Padmaja Ayyagari1, Daifeng He2
1Department of Health Management and Policy, University of Iowa, Iowa City, IA.
The American Economic Review
|March 17, 2018
Summary
The introduction of Medicare Part D, which reduced seniors' prescription drug costs, led to increased financial risk-taking in their investment portfolios. This suggests that mitigating medical expenditure risk encourages greater investment in financial assets.
Area of Science:
- Health Economics
- Gerontology
- Behavioral Economics
Background:
- Elderly individuals face substantial medical expenditure risk, even with health insurance.
- Cost-sharing in insurance plans creates undiversifiable background risk for medical spending.
- Economic theory posits that increased background risk lowers willingness to bear financial risk.
Purpose of the Study:
- To evaluate the impact of medical expenditure risk on elderly individuals' portfolio choices.
- To test the hypothesis that reduced background risk increases financial risk-taking.
- To analyze the effect of Medicare Part D on seniors' investment behavior.
Main Methods:
- Econometric analysis of portfolio choice before and after Medicare Part D implementation.
- Utilizing the introduction of the Medicare Part D program as a natural experiment.
- Estimating changes in financial risk exposure linked to reduced prescription drug spending risk.
Main Results:
- The Medicare Part D program significantly reduced seniors' out-of-pocket prescription drug expenses.
- Following Medicare Part D, elderly individuals exhibited a measurable increase in financial risk-taking within their portfolios.
- The reduction in medical spending risk was associated with a greater allocation to riskier assets.
Conclusions:
- Mitigating medical expenditure risk, such as through prescription drug coverage, can lead seniors to increase their financial risk exposure.
- Policy interventions aimed at reducing healthcare cost uncertainty can influence elderly individuals' investment decisions.
- Findings support economic theory linking background risk to financial risk tolerance.
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