SUMMARYMedical 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.