China has undergone a rapid epidemiological transition from infectious diseases to chronic diseases. Using data from the China Health and Retirement Longitudinal Study (CHARLS), this paper documents the profile of chronic diseases among older Chinese people, estimates the impact of the onset of chronic diseases on the labor supply, and examines the correlation between the prevalence of chronic diseases, a household’s medical expenditure and the role of health insurance in reducing medical costs. Empirical results show that the prevalence of chronic diseases is extremely high among older Chinese people and increases sharply with age. We find significant negative effects from the onset of chronic diseases on an individual’s livelihood at work. The estimation results by age and education suggest that the labor supply of the older and more highly educated people is more sensitive to the onset of chronic diseases. We also show that there can be a substantial indirect loss of individual and household income due to the onset of chronic diseases by limiting the labor supply. We find that the prevalence of chronic diseases is significantly associated with higher out-of-pocket medical expenditure. The reduced-form estimation results suggest that people with insurance have lower medical expenditure caused by minor chronic diseases, but this is only the case for women and urban residents. However, health insurance contributes little in reducing medical expenditure caused by major chronic diseases.