Questions and Answers of The Economics Of Health And Health Care

According to some analysts, the success of the ACA is dependent on having most young and healthy adults comply with the individual mandate to buy insurance. What will happen if young adults enroll at
Describe several features of the ACA that are designed to minimize adverse selection.Why might some of those measures not end up working very well?
Suppose that in the Akerlof example, there are only eight cars ranging in quality from ¼to 2 (i.e., there is no complete lemon). Hence, the mean quality level is 1.125. Determine whether the market
Consider the agency relationship in malpractice cases under a contingency fee system.The plaintiff (party that sues) typically pays his or her attorney about one-third of any monetary damages that
Give three examples of asymmetric information in which the health consumer has information that is unavailable to the health provider. Give three concrete examples in which the health provider has
In the Akerlof example, the individuals are treated as indifferent to risk. What would you expect to see in these markets if individuals wanted to avoid risk? What if there were some “risk
Suppose each person’s health expenditures can be predicted with certainty by both the insured and the insurer. What are the implications for insurance markets? Explain the prevalence of insurance
In 1986, the U.S. federal income tax system changed marginal tax rates so that the top federal marginal rate fell from 50 to 33 percent. From what you know about how fringe benefi ts are negotiated,
Suppose your health insurance allows you, a worker, to buy whatever prescription drugs you wish for $5 per prescription. In contract negotiations it is proposed to change this benefi t to
Suppose that a company pays its workers $20 per hour and provides an additional $2 per hour worth of fringe benefi ts, including a basic health insurance policy. Discuss the fi rm’s reaction to a
Blue Cross plans typically have practiced community rating. If other insurance fi rms are seeking healthier patients at reduced rates, what impact will this have on Blue Cross net revenues? Why?
According to the ACA, adults with pre-existing conditions became eligible to join a temporary high-risk pool, which will be superseded by the health care exchange in 2014. To qualify for coverage,
What is job lock? Would you expect job lock to increase or decrease if employer-based health insurance were to be replaced by government-provided health insurance?
Suppose a household does not carry health insurance. Can we conclude that this refl ects failure of insurance markets? Why or why not?
Using Figure 11.1, illustrate the probability that someone will obtain insurance for treatment for(a) A hangnail.(b) A broken arm.(c) A “bad hair” day.(d) Viral meningitis. A. Expected Total
Using Figure 11.2:(a) Calculate an initial labor market equilibrium (wages and employment) determined by the demand and supply of labor.(b) Indicate the wage and employment impacts of a health
Using Figure 11.2:(a) Calculate an initial labor market equilibrium (wages and employment) determined by the demand and supply of labor.(b) Indicate the wage and employment impacts of a health
Using Figure 11.2, consider an insurance policy that provides free “purple aspirin” to all workers. This benefi t provides no conceivable advantage (workers don’t care whether their aspirin is
Using Figure 11.2, indicate the wage and employment impacts of a health insurance policy that costs $2 per hour to the workers and is worth exactly $3 per hour to the workers.Why do your answers to
Consider a difference-in-difference model of job lock. The research fi nds the following probabilities:(a) Interpret each element of this matrix in terms of the probability of changing jobs.(b) Does
Consider the market labor demand L D and labor supply L S , where W is the market wage.Demand: L D = 1,000 − 20 W Supply: L S = −200 + 400 W(a) What is the equilibrium market wage? What is the
Consider two workers, Ralph and Steve. Both of them work for the same employer, and each earns $15 per hour. Steve is taxed at the 15 percent marginal rate. However, Ralph is married, and due to his
Suppose that Charlie’s Pizzeria in Kalamazoo, Michigan, employs 10 employees at a wage level of $9 per person. All other costs (ovens, rent, advertising, return to capital)total $50 per hour, and
What are the key elements that distinguish managed care from FFS plans?
What are the principal differences among HMO, PPO, and POS plans?
How do the economic profi ts (rents) that may be earned by some groups of providers enable MCOs to limit expenditures? What role does the price elasticity of demand play in this process?
Why is selection bias such an important issue in measuring HMO performance?
Discuss ways that managed care organizations may be able to reduce costs of care to their clientele.
Why do some critics argue that managed care organizations provide lower-quality care than FFS plans? Evaluate this possibility from a societal perspective.
After a large increase in membership, HMO enrollments fl attened in the late 1980s and many HMOs suffered fi nancial diffi culties. How could this be explained according to what is known about the
If everyone chose to join an HMO, would average HMO expenditures per case tend to rise or fall? Would national health expenditures tend to rise or fall?
What features of managed care organizations tend to inhibit or discourage people from joining? What features tend to attract people? Discuss the advantages and disadvantages of managed care
Why is the growth of managed care a relatively recent phenomenon? Describe governmental policies and practices that have encouraged managed care organizations and inhibited them.
If traditional FFS leads to demand inducement, what constrains the HMO from underproviding care?
Explain how the availability of alternative delivery systems is expected to produce competitive effects throughout the health economy.
Discuss the ways that managed care organizations can infl uence the adoption of new technologies.
Some critics argue that providers do not have suffi cient fi nancial incentives to provide quality care. Describe some of the existing safeguards. Evaluate the potential role of P4P.How are ACOs
Consider an HMO with a demand curve of the following form: Q = 100 – 2 P . Suppose that its marginal and average costs were $20. If the fi rm maximizes profi ts, determine its price, output, and
In Exercise 1, if the fi rm must act as a perfect competitor, in the long run what will happen to equilibrium price and equilibrium output?Exercise 1Consider an HMO with a demand curve of the
Consistent with Figure 12.1, assume that the FFS price was $100 per visit and the average patient made eight visits per year. A competing managed care organization came in and charged $80 per visit,
Consider the discussion on adverse selection into HMOs and FFS care, as noted through equation (12.2) and Figure 12.3. Suppose that, on average, FFS clients bought $2,000 in servicesF 000 and HMO
Assume that in Figure 12.4, so many providers entered the health care market that individual demand curves fell below the average cost curves. Draw the new equilibrium.What would happen to short-run
Exercise 5 discusses a short-run equilibrium in the health care market. With entry and exit into and from the market, graph and discuss the long-run equilibrium.Exercise 5Assume that in Figure 12.4,
In Table 12.4, the market penetration for managed care rises from 40 percent to 50 percent between Periods 1 and 2 and stays at 50 percent. Suppose, instead, that it fell from 40 percent to 30
What is the nondistribution constraint? In what way is the nondistribution constraint circumvented in the Pauly-Redisch model? What implication does this have for the effi -ciency of the
If an agency could cheaply, and accurately, monitor the delivery and quality of care by health care fi rms, would there be any contract failure in health care remaining? Would there be any need for
In the Lakdawalla-Philipson model, why do the authors claim that the minimum average cost of the for-profi t will determine the industry price?
Suppose that population growth expands the quality–quantity frontier of a Newhouse utility-maximizing nonprofi t hospital. How would its choice of quantity and quality change? In your view, is a
Under which of the models of hospital behavior described in this chapter does the tax-exempt status of nonprofi t hospitals make the most sense? Under which does it make the least sense?
Can we say which are the most effi cient hospitals—nonprofi ts or for-profi ts? Which are the most effi cient nursing homes? What qualifi cations apply to our present knowledge in each case? What
Why might information problems lead to consumer preferences for nonprofi t provision of some goods and services? Reconcile your answer with the observation that most physician care, drug products,
In what sense do nonprofi ts earn “profi ts” and need to earn “profi ts” to survive?
What are some cost advantages that nonprofi ts have over for-profi ts? Are there any disadvantages?
Explain the logic behind the argument that donations have characteristics of a public good.
Weisbrod and Hansmann present different theories on the existence of nonprofi t organizations.Compare and contrast them in regard to the types of fi rms and the ways they are fi nanced.
In Figure 13.1, if two additional voters had demand curves equal to D 0 , what amount of the public good would tend to be provided by the democratic government? Which voters would be unlikely to
In Figure 13.1, suppose that Voter 5 comes to value the public good even more than before. Will there be an increase in the amount provided through the median voter model of the voting process? Why
Under the physicians’ cooperative model, if the supply price of physicians were to rise, how would this affect the equilibrium staff size in the open-staff case? How would it affect the optimal
Of the Newhouse and the physicians’ cooperative models, which nonprofi t hospital is likely to produce more quantity and quality in equilibrium with barriers to entry? In longrun equilibrium, with
Consider Figure 13.3. Are these long-run average cost curves ( LRAC )? What accounts for the nonprofi t advantage? Look first at the "traditional" market model. . In the LR, the "marginal" firm will
Explain why it is often claimed that hospitals compete for doctors rather than patients.What are some of the implications of this phenomenon, assuming that it is true?
Even nonprofi t hospitals must earn a “profi t.” Evaluate this statement.
What is the medical arms race (MAR) hypothesis? What features of hospital markets make the presence of an unproductive MAR possible?
Suppose that the Medicare rate of hospital reimbursement is reduced. Explain why the costs may not be shifted to other patients in the short run.
Explain why only about 5 percent of adults buy long-term care coverage.
Hospital costs have grown following the growth of private and public insurance. Describe other factors that could account for some of the growth.
The headline of an August 21, 2005 article in the New York Times was “It’s the Simple Things, but Some Hospitals Don’t Do Them.” Use the “Quality of Care” section to discuss and explain
The article in Box 14.2 describes similarities between the hospital and airlines industries.What are some signifi cant differences that may prevent or minimize some of the outcomes for hospitals that
Explain how excess demand for nursing home beds may persist over long periods. How can the hypothesis be tested?
Nonprofi ts are dominant in the hospital industry, while for-profi ts dominate the nursing home industry. Develop some possible explanations for this difference.
Informal care provided by children and other family members are good substitutes for LTC for parents. Describe some potential social and demographic changes that may reduce the availability of such
What is a dominant strategy in game theory? Using the payoff matrix shown in Box 14.1, replace the entry in the fi rst row and second column with (125, –50). Does A have a dominant strategy? Does
Assume that there are three groups of hospital patients (instead of two as shown in Figure 14.1): private, Medicare, and Medicaid (which has a lower fi xed rate of reimbursement than Medicare).
Suppose that Medicaid’s hospital reimbursement rates do not cover the variable costs of patient care. Will a profi t-maximizing hospital accept Medicaid patients? If not, under what circumstances
Assume that a patient’s health can be improved by home care or institutional care. Use isoquants and isocost curves to determine the condition for effi cient utilization of these two forms of care.
Consider Figure 14.1. Suppose that a hospital has the ability to be a perfect price discriminator in the private market, that is, it can charge every private patient the maximum that the patient is
Suppose that insurers monitored all health care payments to determine whether the services were appropriate. Would you expect to see more or less tendency toward SID?
Figure 15.2 shows how increased competition can lead to a higher degree of inducement at point E 2 . This suggests that providers try to induce more usage to compensate for lower profi t margins.
If physician fees are fi xed so that they do not adjust to changes in supply, explain how a fi rm whose demand curve slopes downward would react if the fi xed fee were lowered, perhaps by the
What are some criticisms of the target income approach to SID? In the target income model, what determines the physician’s target income? Would target incomes differ between physicians in practice?
In the utility-maximizing model, what forces limit a provider’s ability and willingness to engage in SID? In the profi t-maximizing model of SID, what are the costs to the physician of inducement?
Assuming that SID is prevalent and substantial, what are the implications for policy?A policy to reduce Medicare payment rates? A policy to increase the number of medical school graduates?
What is SAV? What are some economic forces that can help explain SAV? What are some demographic and other considerations? How might physician uncertainty lead to SAV?
Do high utilization rates necessarily indicate the provision of unnecessary care? If not, why not?
If the cause of SAV is lack of information about the productivities of various procedures, would you expect SAV to have increased, decreased, or stayed the same over time? Why?
As new technologies become available more rapidly for given procedures, would you expect an increased or decreased amount of SAV?
Suppose large variations occur in use rates within a typical small area, as well as among small areas. What would this mean for policy?
Explain why the indifference curves in Figure 15.2 are positively sloped. Net income A B 0 U1 mQo+ml E E2 U2 m'Q+m'I I IE,TE2 Inducement Figure 15.2 Physician's Response to Reduced Rate of Profit
In Figure 15.2, suppose that the initial profi t is $1 per unit of inducement ( m = 1). Suppose then, that increased competition lowers m from 1 to 0.5.(a) Draw the new profi t line π = mQ o + mI
In comparing SAV among diseases and diagnoses, would more complicated diseases suggest greater or lesser variation?
Consider the approximation of the welfare loss due to inter-area deviations from the correct rate of care. All else equal, which procedures would yield the largest welfare losses—those with low
Give examples of ways in which labor and capital can be substituted for each other in the production of health services.
In the text, we considered only forgone income and tuition as costs of going to medical school. Enumerate other monetary and nonmonetary opportunity costs. Why are these opportunity costs relevant?
Why might demand for nurse labor by hospitals or other organized health providers be monopsonistic?
What is the marginal product of an input? Marginal revenue product? Why does the demand for a factor correspond to the marginal revenue product curve? What will determine whether the demand for a
Why will a profi t-maximizing physician fi rm want to equalize the marginal product per dollar spent across all inputs?
What is meant by the term barriers to entry ? What are some entry barriers for someone who wants to be an obstetrician? For someone who wants to be a nursing assistant?
If barriers to entry into a profession were absolute so that entry would not be possible, what would the supply curve look like? What would the supply curve look like if entry into an occupation were
Defi ne monopsony and marginal labor cost . Why is the marginal labor cost in the case of monopsony above the supply (average labor cost) curve? What is the nature of the ineffi ciency or
If there were no subsidies for medical education, would enrollments be larger or smaller?Would the return to medical education be larger or smaller? If physician education was not subsidized, would

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