Household debt, self-insurance, and subjective medical expenses risk

I examine the effect of medical expenses risk on debt. If individuals expect a medical expenses shock to be short-lived, it is rational to borrow to pay for medical bills and smooth consumption. By contrast, a persistent shock should decrease borrowing as loan repayments will be costly to make if future medical costs are also higher. I estimate changes to subjective forecasts of future medical expenses and debt in the months leading up to Medicare eligibility, as well as upper bounds for the effect of new information on debt for Medicare enrollees. The results indicate that there is a negligible negative effect on borrowing of lifetime medical expenses risk, but potentially a substantial positive effect of transitory medical expenses shocks, which partially accounts for the positive relationship between forecast medical expenses risk and debt in the data.