Previous Exams

NAME_____________________________

Health Economics Professor Rubin
Mid-Term Exam March 9, 1999

Answer each of the following four questions. Each question is worth 25 points.

1. The graph below depicts the marginal cost, marginal revenue and demand curve facing Dr. Rutgers, one of many physicians practicing in Medicalville, USA.

a. On the graph, identify the profit maximizing price and quantity of private patients Dr. Rutgers will treat.
b. Suppose a new managed care organization comes to Medicalville. After a meeting between the parties, Dr. Rutgers agrees to accept the offer to participate in this managed care organization. On the graph indicate a per patient payment that would be sufficient to obtain Dr. Rutgers’ participation. Also, clearly indicate the number of private pay patients and the number of managed care patients that Dr. Rutgers would prefer to treat.
c. Now suppose that a community group announces that Dr. Rutgers is the winner of its Doctor of the Year Award. Use the graph to show how this announcement would affect Dr. Rutgers’ willingness to participate in the managed care program. Explain the change, if any, in the graph.

[On the actual exam I added a graph with the standard MC, MR and D curves facing a firm with some monopoly power. As of 10/3/01 we have not yet discussed this topic but we will get to this sometime, though not necessarily in time for the first exam.]

2. a. “Utility depends on health status. Therefore, individuals who seek to maximize their utility should maximize their health status.”

b. “Health status depends on the consumption of health care. Therefore, individuals who seek to have the highest level of health should maximize their consumption of health care.”

Separately discuss the validity of both statements. Be sure to rely on some examples to support your claims as to whether or not these statements are valid.

3. a. Briefly review the changes in aggregate health care spending that have occurred in the last several years.

b. Explain the reasoning behind the following statement from the article by Smith et al.: “the recent higher growth in real per capita income, which, when combined with the anticipated slowdown in private-sector managed care enrollment increases, will boost growth in real per capita private health spending.”

4. The RAND Health Insurance Experiment was designed to address several questions. In particular, the researchers were interested: 1.) in being able to estimate the cost to the government of a national health insurance program; 2.) in determining whether efforts to control costs would conflict with efforts to improve the health of the population; 3.) in finding out whether inpatient and outpatient services were complements or substitutes. Using your knowledge of the design of the experiment and the results, discuss which results could be used, and how they would be used, to answer these three questions.

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Health Economics Professor Rubin
Mid-Term Exam October 25, 2001

PART 1: Answer the following two questions. Each question is worth 30 points.

1. In the Rand Health Insurance Experiment (HIE) the researchers designed the experiment to allow them to study many questions including the following two topics: (1) The relationship between the use of outpatient and inpatient care and (2) The true effectiveness of HMO’s in affecting utilization of medical care.

Take one of these two topics (clearly indicate at the beginning of your answer which topic you are writing about) and answer the following questions:

a. How was the HIE designed so that the experiment would yield the data necessary to study this question?

b. What results did the researchers report based on their analysis of the HIE data?

2. Assume a risk averse individual expects to earn an income of $100,000 in the coming year. Also assume the individual knows he/she faces a 40% chance of having a medical problem that would require him/her to incur health care costs of $20,000.

a. What is the expected loss?

b. What is this person’s expected income?

c. What is the pure premium?

d. Use a graph to show why a risk averse person would prefer having an insurance policy that charged the pure premium rather than having no insurance.

e. Use the same graph and show the maximum amount above the pure premium the individual would pay for an insurance policy to cover the possible medical expenses. (Do not provide a numerical answer; just indicate the amount of above the pure premium on your graph.)

f. Use the graph to determine if the individual’s maximum willingness to pay some amount above the pure premium would go up or down if the likelihood of the event increased from 40% to 95%. Explain your answer.

Part 2: Answer two of the following three questions. Each question is worth 20 points.

3. A.) Use a graph to depict the relationship between health care and health when health care is subject to diminishing returns. Be sure to carefully label the axes and explain what is going on.
B.) Suppose this individual made some changes in his or her lifestyle that are generally associated with improved health. Would this change anything on the graph? If so, show the change and explain why it occurs.

4. Read the attached article regarding the demand for a particular kind of prescription drug to treat patients with heart disease. Compare the findings presented in this article to the findings presented in the article on blood pressure medication by Blustein. In particular, are these results consistent or inconsistent with the findings reported by Blustein?

5. Briefly explain two of the following three concepts in the context of medical care:

a. asymmetric information and the principal-agent relationship
b. moral hazard
c. supply side versus demand side incentives

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Health Economics Professor Jeff Rubin
Final Exam December 21, 2002

PART 1: You must answer the first two questions. Each question is worth 30 points.

1. Assume a risk averse individual expects to earn an income of $80,000 in the coming year. Also assume the individual knows he/she faces a 30% chance of having a medical problem that would require him/her to incur health care costs of $30,000.

a. What is the expected loss?

b. What is this person’s expected income?

c. What is the pure premium?

d. Use a graph to show why a risk averse person would prefer having an insurance policy that charged the pure premium rather than having no insurance.

f. Use the graph to determine if the individual’s maximum willingness to pay some amount above the pure premium would go up or down if the likelihood of the event decreased from 30% to 1%. Explain your answer.

2. Assume that physicians can be viewed as firms in a monopolistically competitive market. Also assume that a particular state has set its Medicaid rate (this is the rate Medicaid will pay the doctor for each visit provided to a Medicaid eligible person) for doctor visits high enough so that the type of doctors in question would be willing to accept some Medicaid patients along with private patients.

Draw a graph depicting this situation and clearly indicate the profit maximizing quantity of private patients and Medicaid patients this doctor will treat. Also, clearly label the price the doctor will get from Medicaid and the price they will charge private patients.

On the same graph answer the following question:

Suppose in an effort to save money the state Medicaid agency decides to reduce the per visit compensation it provides to doctors who see Medicaid patients. Assume that the reduction in the Medicaid rate does not lead the doctor in question to drop out of the Medicaid program altogether. Instead, assume the decline in the Medicaid rate just causes the profit-maximizing doctor to reduce the quantity of Medicaid visits he will supply. On your graph clearly show :

a. the reduction in the Medicaid rate,
b. identify the change in Medicaid visits provided and
c. show the effects of the change in the Medicaid rate on the quantity and price of visits for private pay patients.

PART 2: You must answer 3 out of the next four questions. Each question is worth 30 points.

3. The Medicare program consists of two distinct parts: Part A and Part B. Explain how these two parts differ with respect to the following three issues:

a. Financing
b. Eligibility
c. Benefits

4. The following strategies or actions have been pursued in an effort to control health care spending. Pick two of these three strategies or actions and briefly explain what each one is and the reasoning behind these approaches to controlling costs.

a. Shift of Medicaid and Medicare enrollees into managed care;
b. Introduction of DRG system by Medicare to pay for inpatient hospital care;
c. Decisions by hospitals to merge

5. Policy officials are concerned with the growing proportion of the population that lacks health insurance and thus access to medical care is diminished. Pick two of the following three approaches to improving access and explain what they are and some of the pros and cons with each one.

a. Mandating that employers provide health insurance to all employees;
b. Expanding eligibility rules for Medicaid;
c. Eliminating the requirement that an HMO gatekeeper must provide a referral for a patient to see a specialist.

6. Consider the following quote from Henderson:

“Until recently, medical care financing was dominated by a system of reimbursement that…encouraged the expansion of costly technology, even in cases where medical outcomes were only marginally improved….Only recently has the incentive structure tilted away from encouraging cost-increasing…technology toward encouraging potentially cost-saving…technology.” (p. 392)

Explain the basic idea behind this statement and give an example of the two kinds of technologies Henderson is describing.

Health Economics 220:316 Spring 2002
Final Exam Professor Rubin

This exam consists of 5 questions. Each question is worth 30 points.

1. A. Draw a graph showing the relationship between income and total utility, assuming diminishing marginal utility of income. Be sure to label the axes.

B. Assume an individual will earn $200,000 in the year. Also assume this individual faces a 20% chance of incurring medical expenses totaling $50,000 during the year. Identify the individual’s expected income and expected utility on the graph.

C. What is the pure premium for a policy to cover this individual?

D. Identify, on the graph, the maximum amount above the pure premium this individual would be willing to pay for insurance.

E. Explain what would happen to the willingness to pay something above the pure premium if the probability of the event increased to 99%. It would help to refer to your graph.

2. Assume that a physician practice can be viewed as one of many firms in a monopolistically competitive market. Assume that in addition to private pay patients, the physician’s only other source of income is from patients who are covered by Medicare and assume the Medicare payment represents payment in full for physician visits from Medicare eligible patients (that is, there are no additional payments from patients). Furthermore, assume that the physician has willingly agreed to accept Medicare patients along with his private pay patients and that the physician has been able to structure his practice so that he serves the profit maximizing number of both private pay patients and Medicare patients.

A. Draw a graph depicting the situation outlined above being sure to identify on the graph the following points: The private sector profit maximizing price; the profit maximizing number of private pay patients; the profit maximizing number of Medicare patients the physician serves; and the Medicare payment rate.

B. Assume that over time Medicare holds its payment fixed while the physician’s cost of providing services increases. In fact, suppose that marginal costs increase just to the point where the physician determines that he will no longer accept Medicare patients. Show this situation on the graph, carefully labeling the new marginal cost curve and the new profit maximizing price and quantity of private pay patients.

3. Suppose the government is proposing a new law that would require all firms that do not now provide health insurance for their employees to purchase a basic plan for their employees. Furthermore, assume that the employees substantially undervalue this coverage. Using demand and supply curves, show how this new law affects equilibrium employment and wages. Given these results briefly discuss the pros and cons of passing this legislation.

4. Among the typical features of traditional HMOs are the following:

a. salaried physicians located in a single setting;
b. capitated payments from employers for covered persons;
c. gatekeeping by primary care doctors;
d. an extensive array of preventive services.

Discuss THREE of these features of a traditional HMO from the perspective of an economist interested in issues of cost, access and incentives. In your answer you might also want to consider, where appropriate, the three themes Henderson discussed: fee schedules, global budgets and resource rationing.

5. Discuss TWO of the following three concepts:

1. Unbundling of services by hospitals in the context of Medicare’s effort to set appropriate DRG rates for inpatient hospital care.

2. Interdependent utility functions as a basis for understanding the restrictions in Medicaid on who is eligible and what benefits are covered.

3. Hospital mergers and the competing efforts to promote efficiency in the production of hospital services while trying to prevent dominant firms from gaining too much market power.

Health Economics Professor Jeff Rubin
Mid-Term Examination March 13, 2002

This exam is in two parts. In part 1 you must do both questions (worth 30 points each) and in part 2 you must do 2 out of the 3 questions (worth 20 points each).

PART 1 – Answer both questions; each question is worth 30 points.

1. A. Draw a graph showing the relationship between income and total utility, assuming diminishing marginal utility of income. Be sure to label the axes.

B. Assume an individual will earn $100,000 in the year. Also assume this individual faces a 10% chance of incurring medical expenses totaling $30,000 during the year. Identify the individual’s expected income and expected utility on the graph.

C. Determine the pure premium and identify, on the graph, the maximum amount above the pure premium this individual would be willing to pay for insurance.

D. Explain what would happen to the maximum amount above the pure premium if the probability of incurring the $30,000 expense was a little bit higher and what would happen if the probability was little bit lower. You should to refer to the graph in developing your answer.

E. Explain what would happen to the willingness to pay something above the pure premium if the probability of the event got very large and if it got very small. Again, it would help to refer to your graph.

2. Medoff writes in his article on abortion that “The price elasticity of demand for abortions is -.81, which is consistent with other studies that have found that the price elasticity of demand for health services is inelastic.” (p. 358)

Manning et al., in their article on the RAND Health Insurance Experiment, write “that price elasticities for a constant coinsurance policy are in the –0.1 to –0.2 range,…” (p.268)

A. Discuss the fundamental methodological difference in the way these two studies were done.
B. Discuss some reasons why there is a large difference in the magnitude of the elasticity results.

PART 2 – Answer two out of the following three questions; each question is worth 20 points.

3. For question number 3, answer either part (a) or part (b)

a. Explain the terms ‘community rating’ and ‘experience rating’ and explain how one of these approaches has become dominant in the health insurance market and discuss some of the implications of this development.

b. Explain the term ‘self-insurance’ and discuss some of the reasons why a firm might decide to self-insure.

4. A. Use marginal benefit and marginal cost curves to identify the optimal number of people who should have a particular medical test done, assuming that people with certain characteristics (family history, age, etc.) are more likely to have evidence of the disease the test is searching for than others. In drawing your graph, assume that the marginal cost of doing the test is constant.

B. Using the same graph, show what happens to the optimal level of testing if more effective means of treating the condition being tested for become available. For example, assume that survival rates for breast cancer treatment are increased because of a new drug that can be given to women who have been found to have a cancerous growth after a mammogram.

C. Keep the assumption of a constant marginal cost of testing. Now, assume that the test is of equal benefit to everyone who is tested. (You can decide how large the benefit is.) Given this situation, what conclusion do you reach about the optimal amount of testing? A separate graph would help.

5. What has happened (generally) to the share of GDP devoted to health care in the last five years and what has happened to the proportion of the population without health insurance during this period? Do you think these developments are related and if so, explain how they might be related? Be sure to consider other factors that might have affected both variables (health spending as a share of GDP and the proportion of the population that is uninsured) in presenting your answer.

Health Economics Professor Jeff Rubin
Mid-Term Exam October 2002

STUDENT NAME_______________________

Answer each of the following two questions. Each question is worth 30 points.

1. Assume a risk averse individual expects to earn $80,000 in a given year. Also assume this individual knows that he faces a 20% chance of having a medical problem that would require him to incur health care costs of $10,000 during the year.

a. Draw a graph showing the relationship between income and utility for this individual. On that graph clearly label this individual’s expected income and expected utility. Use the graph to explain why this individual would purchase an insurance policy with a premium of $2,000.

b. Use the graph to show the maximum amount above the pure premium this individual would be willing to pay for insurance against the financial cost of the possible illness. Explain your answer.

c. Describe (in words) what happens to the maximum amount above the pure premium the individual would be willing to pay when the probability of the event goes from being very, very unlikely to being somewhat likely to being very, very likely.

2. a. Using a standard demand curve show what happens to the demand for medical care when the coinsurance rate (the proportion of the bill the consumer is responsible for) goes from 100% to 50%. In explaining your answer use a price per visit of $100 to illustrate the effects of the lower coinsurance rate.

b. Define the concept of price elasticity of demand. How does the elasticity of demand for medical care affect the extent of moral hazard associated with more insurance coverage?

c. Explain how a reduction of the marginal tax rate on earned income would affect the likelihood that an employee will prefer employer-provided health insurance over a comparable increase in wages.

Answer two of the following three questions. Each question is worth 20 points.

3. Explain the rationale for the following methodological decisions:

a. In the RAND Health Insurance Experiment the researchers decided to randomly assign insurance coverages to people who agreed to participate in the experiment.

b. In the Medoff study on the determinants of interstate differences in abortion rates the author decided to include the percentage of women ages 15 to 44 who were in the labor force in each state as an independent variable in his regression equation.

4. Levit et al. cite the following two factors as contributing to the recent increase in the rate of growth in health care spending:

a. “those who are insured through employer-sponsored plans…choose less restrictive…options.”

b. “some HMOs are abandoning capitation…for FFS [fee for service] arrangements with physicians and hospitals.”

Discuss the general findings Levit et al. report on health care spending and explain how these two factors have played a role in these changes.

5. Define two of the three following concepts and explain their relevance in the study of the economics of health care markets:

a. Time price

b. Community rating and experience rating

c. Natural experiment (use the study by Ferris et al. in discussing this concept)

Health Economics Professor Rubin
Final Exam December 2002

PART 1: You must answer the following three questions. Each question is worth 30 points.

1. Assume a risk averse individual expects to earn $80,000 in a given year. Also assume this individual knows that he faces a 30% chance of having a medical problem that would require him to incur health care costs of $20,000 during the year.

b. Use the graph to show the maximum amount above the pure premium this individual would be willing to pay for insurance against the financial cost of the possible illness. Explain your answer.

c. ON THE GRAPH show how the maximum amount he is willing to pay above the pure premium changes when the probability of the event changes from 30% to 3%.

2. Assume a physician practice in a large city can be considered equivalent to a firm in a monopolistically competitive market.

a. Draw a graph depicting this physician’s demand curve, marginal revenue curve and marginal cost curve and clearly label the profit maximizing price and quantity of patients this physician would serve.

b. Assume the local government, in an effort to reduce the number of people who are uninsured, decides to establish a government health insurance program. After signing people up for the program the administrator of the government program sets the price they will pay for a routine physician visit but finds that physicians like the one in your graph refuse to accept any people enrolled in the government program. Use the graph to explain what is happening and why a profit maximizing physician would choose not to participate in this program.

c. On your graph show a price that the government would have to agree to pay so that your typical physician’s profit maximizing behavior would result in having about half of his patients come from the private sector and half come from the government program. (It is not real tricky; just think about what I am asking for here.) It is important to show the amount of public and private visits on the graph to clarify your answer.

3. The following quote is from the appellate court’s opinion in FTC v. Tenet. Explain what the court is saying AND its relevance to the appellate court’s decision. Be sure to focus on the economic principles and the economic evidence discussed in this opinion. Your answer should include a very brief summary of the basic facts in this case.

a. “We question the district court’s reliance on the testimony of managed care payers, in the face of contrary evidence, that these for-profit entities would unhesitatingly accept a price increase rather than steer their subscribers to hospitals in Sikestown or Cape Girardeau…the evidence shows that patients will choose whatever doctors or hospitals are covered by their health plan….”

PART II You must answer THREE of the following four questions. Each question is worth 20 points.

4. Explain the differences between Medicare and Medicaid with respect to
a. eligibility rules; b. the way each program is financed.

5. Using the simple supply and demand model presented in Summers’s article, explain how a mandate requiring all employers to provide health insurance would affect the equilibrium wage and employment level. Use the graph to show how an increase in the cost of health insurance, keeping the level of insurance coverage exactly the same, alters the effects of the mandate.

6. Assume access to health care for the poor is an element in each non-poor person’s utility function; that is, the non-poor get positive utility from seeing that the poor have access to basic health care services.

a. Using the idea of a public good, explain how private markets might fail to produce an adequate level of health care for the poor.
b. Using this same model, explain why coverage for abortions under Medicaid can be controversial. (There is no need to get into the serious ethical issues associated with abortions; just keep your answer straightforward.)

7. Use a graph to show how equilibrium price and quantity will differ between a hospital that is run as a for-profit institution and a hospital whose managers are trying to maximize quantity subject to the constraint that they do not lose money. (You should assume the hospital has some monopoly power; that is, it is not operating in a perfectly competitive market.) Explain your answer.

Professor Rubin                                                                               Mid-Term Exam
Health Economics                                                                           October 2005

You must answer 4 of the following five questions. Each question is worth 25 points.

1. Assume an individual will earn $80,000 during the year. Also assume the individual faces a 20% chance of a medical event occurring. If this event occurs, the consumer will have to spend $20,000 for medical care. Using this information draw a graph (plotting income and utility) that shows the individual’s expected utility and expected income (make sure you show an exact amount for expected income; you can just label expected utility as E(u)).

On the graph indicate the maximum amount above the pure premium this individual would be willing to pay for insurance that would cover the entire cost of this event, should it occur. Also, indicate on the graph the pure premium for this insurance. Explain why this amount is called the ‘pure premium.’

Finally, on the SAME graph show what would happen to the maximum amount above the pure premium if the probability of the event increased.

2. In the Health Insurance Experiment, Manning et al. wanted to learn about the impact of enrollment in an HMO on use of medical care. Briefly explain the key features of the pure HMO model. Next, describe the two major questions Manning et al, addressed with respect to HMOs, discuss how the experiment was designed to answer the questions and briefly summarize the findings.

3. In their article Smith et al. offered details on health care spending in the U.S. in 2003.
Fill in the blanks in the following sentence and then answer the essay question.
(In the blue book list a, b, c, and d and write the numbers for each blank.)

Health care spending in the U.S. grew _____ percent between 2002 and 2003, reaching ______ percent of GDP.   Overall spending was ______ dollars or _______ dollars per capita.

Smith et al. point out that one way firms can respond to higher costs of medical care and the associated higher costs of health care premiums is to shift ‘more health care costs to workers.” Describe two ways firms shift these costs and discuss how these changes are intended to reduce employer costs for health care. Any specific examples you can cite would bolster your answer.

4.         a. What is the primary problem with trying to use cost-benefit analysis to evaluate health care interventions?
    b. Explain how cost-effectiveness analysis avoids the main problem associated with cost-benefit analysis.
c. Unfortunately, other problems arise in applying cost-effectiveness analysis in cases where the objective is to save lives. Discuss the typical solution most researchers have adopted to resolve this problem.

5. For an individual consumer, assume they can purchase as many units of some medical service as they wish at a given price. Assuming diminishing marginal utility with each additional unit of services draw a graph and show the level of care this person would consume (label it Q). Now show what happens to consumption if the individual’s purchase of care is subsidized so that the consumer only has to pay 70% of the per unit cost.

Using the graph, discuss the concept of moral hazard in the consumption of medical care.

Health insurance that subsidizes the cost of consuming health care generates at least two other types of moral hazard. Briefly describe these other forms of moral hazard due to the presence of health insurance.

Health Economics                                                                               Final Exam
Professor Rubin                                                                                  December 2005

NAME ________________________

ALL QUESTIONS ARE WORTH 30 POINTS.

Part 1: You must answer the following question.

1.    In the Health Insurance Experiment, Manning et al. wanted to learn about the impact of enrollment in an HMO on use of medical care. Briefly explain the key features of the pure HMO model. Next, describe the two major questions Manning et al. addressed with respect to HMOs, discuss how the experiment was designed to answer the questions and briefly summarize the findings.

Part 2: You must answer 2 out of the following 3 questions.

2.    The graph on the next page depicts the situation for a physician firm, assuming the firm is selling its services in a monopolistically competitive market. It also assumes that physicians sell all of their services at a single price (i.e. there is no price discrimination). Furthermore, you can assume the owners of the firm are trying to maximize profits.

a.    Label the four lines in the graph and clearly identify the profit maximizing price the firm would charge and the profit maximizing quantity of visits they would deliver.
b.    Assume the state’s Medicaid program offers to reimburse physicians $40 for each routine visit they provide to a Medicaid enrolled individual. Would this physician agree to participate in the program and, if so, how many private and how many Medicaid patients would the physician prefer to see? Write your answer to this part in the blue book.
c.    Next assume that the largest employer in town, who is not providing health insurance to its employees, loses a big government contract and decides to lays off many of its workers. As a result a large number of these individuals move to another state. Using the graph show how this might affect the physician’s decision to participate in the Medicaid program. Again, mark the graph on the next page but write your answer in the blue book.

3.    Spang et al. write “Hospitals contend that mergers allow them to realize efficiency gains, reduce excess capacity…and increase their capacity to accept risk based payment. Even so, mergers in highly concentrated markets could allow hospitals to increase their market power, thwart payers’ efforts to promote cost containment, and thus increase hospital prices.” (underline added)

Using information from the material you read on hospital mergers discuss the five underlined topics, being sure to comment on both the theoretical reasoning behind these claims and any related empirical results reported in the literature.

4.    Assume that the non-elderly, non-poor population in the U.S. gets some utility from assuring access to health care for the poor and elderly. Explain how this information might be used to justify public health insurance programs. Also, use this observation to explain some specific service and eligibility rules governing both Medicaid and Medicare.

Part 3: Answer 2 out of the following 3 questions.

5.    The growth of physician investments in outpatient surgical centers has raised some concerns for hospitals and insurers. Explain how having a financial stake in such a center might affect physician behavior. Also, what are the possible consequences for hospitals of increased competition from these centers? Why would insurers be concerned with expansion of these facilities and how might the insurers adjust their payment policies in light of this development?

6.    Using a graph, explain how the tax treatment of employer-provided health insurance encourages employees to choose insurance over cash. Also, consider (using both a graph and words) how reductions in marginal tax rates could lead to an increase in the number of people who are uninsured. In particular, which kinds of people would be most likely to reject an offer of health insurance from their employer and instead choose an equivalent cash payment?

7.    One option some states are considering as a way to reform the health care system is to require (mandate) that all employers provide health insurance coverage for their employees. Focusing on the economic issues, discuss some of the arguments for and against this proposal.

Health Economics                                                                      Mid-Term Exam
Professor Rubin                                                                         March 8, 2006

Answer 4 out of the following 5 questions. Each question is worth 25 points.

1.    Use four separate graphs to illustrate how each of the following changes would affect the demand curve for outpatient testing done at a large city hospital. In each case, explain your reasoning. (Assume that the vertical axis measures the price the hospital charges.)

a.    Insurers reduce the portion of the cost consumers pay if they use a freestanding (non-hospital based) testing facility.
b.    Average real income in the community rises.
c.    The hospital adopts a new computerized scheduling program for outpatient care that reduces the time between check-in and check-out for the test.
d.    The price of regular check-ups with physicians increases.

2.    Manning et al. report that among people in the Health Insurance Experiment who were assigned to the HMO, 7.1% had one or more hospital admissions. Among people assigned to the ‘free care’ plan, 11.2% had one or more hospital admissions.

a.    Explain why the authors can be reasonably certain that the difference in the use of hospitals is due to the way doctors in the different plans behave.
b.    Explain how the structure and organization of an HMO leads to a “less hospital-intensive style of medicine.”

3.    a. In your blue book list the correct numbers that belong in each blank.

1.)    Total health care spending in 2004 was just about ________ dollars.
2.)    Health care spending in 2004 accounted for _______ % of GDP.
3.)    The rate of growth in health care spending between 2003 and 2004 was ______%.

b. Smith et al. write that increasing costs have led “to greater interest in paying for improved quality or outcomes, disease management, and consumer-directed health care.”    Pick just 2 of these three strategies and explain how they are intended to improve “the efficiency of health care spending.”

4.    a. Assume the marginal cost of a flu shot is constant. Furthermore, assume all the benefits of a flu shot go to the person being vaccinated. Draw a graph, identify the optimum (efficient) number of people who should get a flu shot and explain why it is the optimum number. Show on the graph what would happen to the optimal number of flu shots if new research shows that the strain of flu expected next flu season is more likely to lead to pneumonia and possible death. Explain.

b. How is the amount of medical care consumed by an individual affected by having insurance coverage? Using a different graph from the one used in Part a (be sure to label the horizontal axis appropriately) show the effect of insurance. Identify and discuss the concept of moral hazard as it relates to the quantity of care an individual consumes.

5.    a. Use a graph and explain what is meant by ‘flat of the curve’ medicine. Given the structure of health care financing in the U.S. explain why we observe consumption along the ‘flat of the curve.’

b. Along with individual characteristics and access to care, some economists have linked macroeconomic changes with overall measures of health. In fact, Ruhm’s research showed that “an improved economy may be linked to poorer health,” at least in the short run. Ruhm cited four reasons why this inverse relationship between macroeconomic conditions and health outcomes might arise. Identify two of these reasons and explain how they can lead to poorer health outcomes as the economy improve

Health Economics 220:316                                                           Professor Rubin
Final Exam                                                                                   May 4, 2006

PART 1: You must answer all four questions in Part 1. Each question is worth 30 points.

1.    Manning et al. report that among people in the Health Insurance Experiment who were assigned to the HMO, 7.1% had one or more hospital admissions. Among people assigned to the ‘free care’ plan, 11.2% had one or more hospital admissions.

a.    Explain why the authors can be reasonably certain that the difference in the use of hospitals is due to the way doctors in the different plans behave.
b.    Explain how the structure and organization of an HMO leads to a “less hospital-intensive style of medicine.”

2.   Assume Henry Rutgers will earn $100,000 during the year. Also assume Henry faces a 10% chance of a medical event occurring. If this event occurs, Henry will have to spend $30,000 for medical care. Using this information draw a graph (plotting income and utility and assuming diminishing marginal utility of income) that shows Henry’s expected utility and expected income (make sure you show an exact amount for expected income; you can just label expected utility as E(u)).

On the graph indicate the maximum amount above the pure premium Henry would be willing to pay for insurance that would cover the entire cost of this event, should it occur. Also, indicate on the graph the pure premium for this insurance.

Suppose another person, Peter Princeton, has the same income and faces the same likelihood of the same medical event as Henry does. It turns out that the amount Peter is willing to pay above the pure premium is less than the amount above the pure premium Henry is willing to pay. Use the original graph to show this situation and explain what makes Peter different from Henry (besides where they went to school). (You should also assume that Peter and Henry get the exact same utility from their income when the event occurs (when there is no insurance) and when the event doesn’t occur.)

3.    Draw a graph showing the profit maximizing level of physician visits and the profit maximizing price level for a physician firm in a monopolistically competitive market, assuming the physician charges all his or her patients the same price for a visit and that all patients pay for their own care out of pocket.

Assume the physician is now offered the opportunity to join a preferred provider organization. For each patient from the PPO the physician sees he or she will get a fixed amount of money per visit. Assume the profit maximizing physician accepts this offer. On the graph show a PPO offer that is consistent with the physician decision and explain why the physician would accept the offer. Also, indicate on the graph the optimal number of PPO patients this physician would choose to serve.

Finally, assume that a local magazine comes out with a report on the best physicians in this community and this physician is right near the top of the list. Explain how the publication of this rating would affect the physician’s decision to remain in the PPO when the contract comes up for renewal next month.

4.         Describe the managerial expense preference model of hospital behavior and the quantity maximization model of hospital behavior. Make sure you summarize the key predictions these models generate about hospital behavior as compared to the predictions of hospital behavior one would obtain from a profit maximizing model.

PART 2: Each question is worth 30 points. You must answer one of them.

5.    Read the attached article on outpatient surgery centers. Discuss the economic issues raised by the efforts of physicians to establish these freestanding outpatient surgery centers. Among the issues you should address are the following: 1.) Does the creation of these centers raise any concerns about induced demand and why? If so, how might this problem be controlled? 2.) Suppose the hospital is using profits from their outpatient surgery unit to subsidize the delivery of care for those who are unable to pay. How will the opening of an outpatient surgery center affect the hospital’s ability to meet the needs of the poor?

6.    Assume that an individual’s utility depends on, among other things, access to basic medical care among the poorest children in his community but that he doesn’t gain any utility from increasing access to care for any children or adults outside his local community or from increasing access to adults in his own community. Explain why the private market will fail to provide adequate health insurance coverage and what kind of tax and expenditure policy would most likely be optimal (socially efficient) in this situation.