MHA710 Exam 4 Actual Exam Style V3 |
MHA 710 Healthcare Economics |
Louisiana State University in Shreveport
1. Which economic concept explains why individuals with a higher risk of illness are more
likely to purchase comprehensive health insurance?
A. Moral Hazard
B. Adverse Selection
C. Supplier-Induced Demand
D. Risk Aversion
Answer: B
Rationale: Adverse selection occurs when there is asymmetric information between the
insurer and the insured. High-risk individuals possess more information about their health
status and seek coverage that reflects their expected high utilization. This imbalance can
lead to higher premiums for everyone in the risk pool, potentially driving out low-risk
individuals.
2. In the context of health insurance, what does ‘Moral Hazard’ specifically refer to?
A. The tendency for insurance companies to deny coverage to sick people.
B. The change in behavior of an insured person that increases the probability of a loss or
the size of a loss.
,C. The behavior of doctors providing more care than necessary to increase income.
D. The failure of the market to provide insurance to the poor.
Answer: B
Rationale: Moral hazard suggests that people are more likely to consume medical services
when they do not bear the full cost of those services. Because insurance lowers the out-of-
pocket price, individuals may utilize more care than they would if they paid the market
rate. This phenomenon often leads to social deadweight loss and increased total healthcare
spending.
3. What is the primary goal of a Cost-Effectiveness Analysis (CEA) in healthcare?
A. To compare the relative costs and outcomes of different health interventions.
B. To maximize the total revenue of a hospital system.
C. To determine the market price of a new pharmaceutical drug.
D. To ensure that all patients receive the same level of care regardless of cost.
Answer: A
Rationale: Cost-effectiveness analysis is a tool used to identify which medical
interventions provide the best health outcomes for the resources spent. It typically
measures outcomes in natural units, such as years of life saved or infections prevented.
This analysis helps policy makers allocate limited healthcare budgets more efficiently
across competing programs.
,4. The ‘Grossman Model’ of health demand treats health as which of the following?
A. A capital good that depreciates over time.
B. A pure consumption good only.
C. A luxury good with high income elasticity.
D. A public good provided by the government.
Answer: A
Rationale: The Grossman Model views health as a form of human capital that yields utility
and increases the time available for work and leisure. Individuals ‘invest’ in health through
medical care, exercise, and diet while health naturally ‘depreciates’ as they age. This
framework helps explain how education and age influence the demand for both health and
medical services.
5. Which of the following describes ‘Supplier-Induced Demand’ (SID) in the medical market?
A. Patients demanding more services because they are insured.
B. Physicians using their information advantage to persuade patients to consume more
care than is medically necessary.
C. Pharmaceutical companies raising prices due to high demand.
D. The government increasing the supply of medical residency slots.
Answer: B
, Rationale: Supplier-induced demand occurs because physicians act as both the advisor to
the patient and the provider of services. When there is a conflict of interest, physicians may
recommend extra tests or procedures to maintain or increase their income. This theory
suggests that the standard supply and demand model does not fully apply to the healthcare
sector due to information asymmetry.
6. What is the main difference between ‘Experience Rating’ and ‘Community Rating’ in health
insurance?
A. Experience rating sets premiums based on the group’s past medical claims, while
community rating sets the same premium for everyone in a geographic area.
B. Community rating is used only for government programs like Medicaid.
C. Experience rating is illegal under the Affordable Care Act for all types of insurance.
D. Community rating is based on the age and gender of the individual specifically.
Answer: A
Rationale: Experience rating calculates premiums based on the historical healthcare
utilization of a specific group, making it cheaper for healthy groups and more expensive for
sick ones. Community rating ignores individual or group health status, effectively
redistributing costs from high-risk to low-risk individuals. The latter is often used to
ensure broader access to affordable coverage but can lead to adverse selection if not
mandated.
MHA 710 Healthcare Economics |
Louisiana State University in Shreveport
1. Which economic concept explains why individuals with a higher risk of illness are more
likely to purchase comprehensive health insurance?
A. Moral Hazard
B. Adverse Selection
C. Supplier-Induced Demand
D. Risk Aversion
Answer: B
Rationale: Adverse selection occurs when there is asymmetric information between the
insurer and the insured. High-risk individuals possess more information about their health
status and seek coverage that reflects their expected high utilization. This imbalance can
lead to higher premiums for everyone in the risk pool, potentially driving out low-risk
individuals.
2. In the context of health insurance, what does ‘Moral Hazard’ specifically refer to?
A. The tendency for insurance companies to deny coverage to sick people.
B. The change in behavior of an insured person that increases the probability of a loss or
the size of a loss.
,C. The behavior of doctors providing more care than necessary to increase income.
D. The failure of the market to provide insurance to the poor.
Answer: B
Rationale: Moral hazard suggests that people are more likely to consume medical services
when they do not bear the full cost of those services. Because insurance lowers the out-of-
pocket price, individuals may utilize more care than they would if they paid the market
rate. This phenomenon often leads to social deadweight loss and increased total healthcare
spending.
3. What is the primary goal of a Cost-Effectiveness Analysis (CEA) in healthcare?
A. To compare the relative costs and outcomes of different health interventions.
B. To maximize the total revenue of a hospital system.
C. To determine the market price of a new pharmaceutical drug.
D. To ensure that all patients receive the same level of care regardless of cost.
Answer: A
Rationale: Cost-effectiveness analysis is a tool used to identify which medical
interventions provide the best health outcomes for the resources spent. It typically
measures outcomes in natural units, such as years of life saved or infections prevented.
This analysis helps policy makers allocate limited healthcare budgets more efficiently
across competing programs.
,4. The ‘Grossman Model’ of health demand treats health as which of the following?
A. A capital good that depreciates over time.
B. A pure consumption good only.
C. A luxury good with high income elasticity.
D. A public good provided by the government.
Answer: A
Rationale: The Grossman Model views health as a form of human capital that yields utility
and increases the time available for work and leisure. Individuals ‘invest’ in health through
medical care, exercise, and diet while health naturally ‘depreciates’ as they age. This
framework helps explain how education and age influence the demand for both health and
medical services.
5. Which of the following describes ‘Supplier-Induced Demand’ (SID) in the medical market?
A. Patients demanding more services because they are insured.
B. Physicians using their information advantage to persuade patients to consume more
care than is medically necessary.
C. Pharmaceutical companies raising prices due to high demand.
D. The government increasing the supply of medical residency slots.
Answer: B
, Rationale: Supplier-induced demand occurs because physicians act as both the advisor to
the patient and the provider of services. When there is a conflict of interest, physicians may
recommend extra tests or procedures to maintain or increase their income. This theory
suggests that the standard supply and demand model does not fully apply to the healthcare
sector due to information asymmetry.
6. What is the main difference between ‘Experience Rating’ and ‘Community Rating’ in health
insurance?
A. Experience rating sets premiums based on the group’s past medical claims, while
community rating sets the same premium for everyone in a geographic area.
B. Community rating is used only for government programs like Medicaid.
C. Experience rating is illegal under the Affordable Care Act for all types of insurance.
D. Community rating is based on the age and gender of the individual specifically.
Answer: A
Rationale: Experience rating calculates premiums based on the historical healthcare
utilization of a specific group, making it cheaper for healthy groups and more expensive for
sick ones. Community rating ignores individual or group health status, effectively
redistributing costs from high-risk to low-risk individuals. The latter is often used to
ensure broader access to affordable coverage but can lead to adverse selection if not
mandated.
