Deck 5: The Economics of Health Care

Question 1

Better health allows people to work harder,which raises a country's total income.This indicates that in effect,better health

A) is a primary cause of price increases.
B) reduces the incentive to work.
C) shifts out a country's production possibilities frontier.
D) increases consumer surplus.

Answer 1

shifts out a country's production possibilities frontier.

Question 2

The health care system in Japan is referred to as ________,under which every resident of Japan is required to enroll in either a private or the government-provided health insurance program.

A) an out-of-pocket system
B) a single-payer health care system
C) a universal health insurance system
D) socialized medicine

Answer 2

a universal health insurance system

Question 3

On average,people in high-income countries ________ than people in low-income countries.

A) have a shorter life expectancy
B) are subject to a higher infant mortality rate
C) are taller
D) are exposed to more severe diseases

Answer 3

are taller

Question 4

In the United States from 1981 to 2009,deaths from all of the following declined substantially except

A) cancer.
B) kidney disease.
C) heart attacks.
D) strokes.

Question 5

The health care system in the United Kingdom is referred to as ________,under which the government owns most of the hospitals and employs most of the doctors.

A) an out-of-pocket system
B) a single-payer health care system
C) a universal health insurance system
D) socialized medicine

Question 6

Over the past 160 years in the United States,life expectancy

A) has remained fairly constant.
B) has slightly declined.
C) has more than doubled.
D) increased up to the 1950s and then declined for the next 60 years.

Question 7

The health care system in Canada is referred to as ________,and is a system in which the government provides national health insurance to all Canadian residents.

A) an out-of-pocket system
B) a single-payer health care system
C) a universal health insurance system
D) socialized medicine

Question 8

In the United States in 2009,the percentage of people with private health insurance was about

A) 17%.
B) 29%.
C) 54%.
D) 83%.

Question 9

The overall decline in death rates in the United States since 1981 was due to all of the following except

A) a decline in smoking.
B) the decline in the population.
C) the availability of new prescription drugs.
D) new surgical techniques.

Question 10

In the United States from 1981 to 2009,deaths from diabetes increased largely due to the effects of

A) foreign-produced insulin.
B) stress in the workplace.
C) a larger immigrant population.
D) increasing obesity.

Question 11

How can changes over time of the average height of the people in a country help to indicate the standard of living in a country?

Question 12

Changes in the health of the average person are an important indicator of changes in the standard of living.

Question 13

The average height of adult males in the United States

A) has steadily increased since the early 1700s.
B) has remained very constant since the Civil War.
C) rose significantly beginning in 1830.
D) declined in the mid-1800s before beginning to rise again around 1890.

Question 14

How can improvements in health increase a country's total income?

Question 15

Between 1981 and 2009,the overall mortality rate in the United States

A) decreased by more than 25 percent.
B) slowly but steadily increased.
C) remained fairly constant.
D) was similar to the average rate in most low-income countries.

Question 16

Most doctors and hospitals operate as private businesses in all of the following countries except

A) Canada.
B) Japan.
C) the United Kingdom.
D) the United States.

Question 17

Health insurance plans which typically reimburse doctors mainly by paying a flat fee per patient are known as

A) fee-for-service plans.
B) preferred provider organizations.
C) single-health-payer systems.
D) health maintenance organizations.

Question 18

The overall mortality rate in the United States has remained fairly constant for the past 30 years.

Question 19

In the United States in 2009,the percentage of people without any form of health insurance was about

A) 17%.
B) 29%.
C) 54%.
D) 83%.

Question 20

In the United States in 2010,the percentage of firms that employed more than 200 workers and offered health insurance as a fringe benefit to the workers was about

A) 29%.
B) 49%.
C) 68%.
D) 99%.

Question 21

Consider a used car market in which half the cars are good and half are bad (lemons).A rational buyer in this market should

A) offer to pay a price equal to the most she would pay for a good car.
B) offer to pay a price equal to the most she would pay for a lemon.
C) offer to pay a price somewhere between the price she would pay for a good car and the price she would pay for a lemon.
D) save up and buy a new car.

Question 22

A key difficulty facing insurance companies is that people know more about their health than do insurance companies,and that those people who are seriously ill are the most likely to want to obtain health insurance.What is this phenomenon called?

A) moral hazard
B) economic irrationality
C) asymmetric information
D) adverse selection

Question 23

In which of the following countries are substantial co-payments typically required as a part of the health care system?

A) Canada and the United States
B) Japan and Canada.
C) the United States and Japan
D) the United States and the United Kingdom

Question 24

The largest government-run health care system in the world,with 1.7 million employees,is in

A) Canada.
B) Japan.
C) the United Kingdom.
D) the United States.

Question 25

Of the following high-income countries,which has the highest infant mortality rate?

A) Canada
B) Japan
C) the United Kingdom
D) the United States

Question 26

Of the following high-income countries,which has the lowest mortality ratio for cancer?

A) Canada
B) Japan
C) the United Kingdom
D) the United States

Question 27

The term that is used to refer to a situation in which one party to an economic transaction has less information than the other party is

A) inefficient market hypothesis.
B) moral hazard.
C) information disparity.
D) asymmetric information.

Question 28

Typically,the higher the level of income per person in a country,the higher the level of spending per person on health care.This relationship between income and spending indicates that health care is a

A) normal good.
B) inferior good.
C) luxury.
D) necessity.

Question 29

In the United States in 2009,over 90 percent of people without health insurance were below the age of 34.

Question 30

Consider a used car market in which half the cars are good and half are bad (lemons).If buyers are rational,the prices being offered for used cars will result in

A) an equal proportion of a good cars and lemons being sold in an efficient market.
B) a larger proportion of good cars being sold and consequently, consumer surplus is increased.
C) a larger proportion of lemons being sold and consequently, producer surplus is increased.
D) an equal proportion of good cars and lemons being sold in an inefficient market.

Question 31

A majority of people in the United States have private health insurance.

Question 32

Of the following high-income countries,which has the lowest life expectancy at birth?

A) Canada
B) Japan
C) the United Kingdom
D) the United States

Question 33

In the United States,health care spending per person based on income per person is ________ the average for most other countries.

A) slightly lower than
B) significantly higher than
C) significantly lower than
D) comparable to

Question 34

What are the main sources of health insurance in the United States?

Question 35

On average,people in the United States spend a greater percentage of their income on health care than do people in most other countries.

Question 36

Briefly explain 4 of the difficulties in making cross-country comparisons in health care outcomes.

Question 37

Health insurance typically pays for most preventive care procedures in all of the following countries except

A) Canada.
B) Japan.
C) the United Kingdom.
D) the United States.

Question 38

Which of the following parties is likely to have the most information about the health of an individual who is trying to purchase a health insurance policy?

A) the company that issues the health insurance policy
B) the individual who is applying for the health insurance policy
C) the employer of the individual who is trying to purchase the health insurance policy
D) All parties in the health insurance market have access to the same level of information.

Question 39

An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better that the company that he is more likely to make a claim on a policy.What is the term used to describe the situation above?

A) moral hazard
B) adverse selection
C) asymmetric information
D) economic irrationality

Question 40

What is adverse selection?

A) It refers to the private, self-interested actions people that people pursue, which when taken collectively leads to a loss in economic surplus.
B) It refers to the actions people take after they have entered into a transaction that make the other party to the transaction worse off.
C) It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
D) It refers to the actions people take before they enter into a transaction so as to mislead the other party to the transaction.

Question 41

Automobile insurance companies have a problem with people who buy insurance and then drive recklessly or take less care to avoid losses after being insured.In other words,the automobile insurance market is subject to

A) asymmetric information.
B) market signaling.
C) moral hazard.
D) adverse selection.

Question 42

If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems,the insurance company is trying to reduce

A) the problem of adverse selection.
B) the moral hazard problem.
C) sunk costs.
D) asymmetric information.

Question 43

Which of the following individuals is most likely to purchase a life insurance policy that pays out an annual income beginning at a certain age until the individual's death?

A) Ian, who expects to have a short life expectancy because of an illness
B) Bradley who has six young children
C) Avril, a tax attorney who wants to avoid adverse selection
D) Alma, who expects to live a long life, based on her family history

Question 44

If a buyer in an economic transaction has more information than the seller,the buyer benefits at the expense of the seller.This phenomenon is due to

A) moral hazard.
B) adverse selection.
C) economically irrational behavior.
D) gains from trade.

Question 45

The Pre-Existing Condition Insurance Plan is a federally administered part of the Affordable Care Act,and is designed for people with pre-existing medical conditions to obtain insurance.By offering health insurance to all U.S.citizens with pre-existing medical conditions,the Pre-Existing Condition Insurance Plan eliminates ________ for both the insurer and the insured,and eliminates ________ for the issuer of the insurance policy.

A) the principal-agent problem; moral hazard
B) asymmetric information; adverse selection
C) adverse selection; the principal-agent problem
D) moral hazard; adverse selection

Question 46

One reason why adverse selection problems arise in health insurance markets is that

A) sick people are more likely to want health insurance than healthy people.
B) because of advances in medical technology, people are living longer. These medical advances are costly and drive up the price of insurance for everyone.
C) the average age of citizens of the United States has increased in recent years, and will continue to increase over the next 20 to 30 years. As older citizens retire, more and more of their medical bills will have to be paid by younger workers.
D) fewer men and women are choosing medical careers because of the increase in the cost of malpractice insurance.

Question 47

Consider a used car market in which half the cars are good and half are bad (lemons).Suppose the average price of a good car is $9,000 and the average price of a lemon is $3,000.If rational buyers are willing to pay $6,000 for a used car,then sellers will agree to sell mostly the lemons at this price.What is the term used to describe this situation?

A) moral hazard
B) adverse selection
C) an efficient market
D) economic irrationality

Question 48

Adverse selection occurs in the market for used cars because used car buyers

A) have more information than used car sellers.
B) have less information than used car sellers.
C) have less incentive to maintain the value of their cars than new car buyers.
D) tend to have more accidents than new car buyers.

Question 49

What is moral hazard?

A) It refers to the private, self-interested actions that people pursue, which when taken collectively leads to a loss in economic surplus.
B) It refers to the actions people take after they have entered into a transaction that makes the other party to the transaction worse off.
C) It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
D) It refers to the actions people take before they enter into a transaction so as to mislead the other party to the transaction.

Question 50

Suppose that in a market for used cars,there are good used cars and bad used cars (lemons).Consumers are willing to pay as much as $6,000 for a good used car but only $1,000 for a lemon.Sellers of good used cars value their cars at $5,000 each and sellers of lemons value their cars at $800 each.Buyers cannot tell if a used car is reliable or is a lemon.Based on this information,what is the likely outcome in the market for used cars?

A) Sellers of good used cars will drop out of the market.
B) Sellers of good used cars will incur losses.
C) Sellers of lemons will drop out of the market.
D) Used cars will sell for $3,000.

Question 51

Which of the following is not an advantage to an insurance company of insuring a large group of people for health insurance?

A) The characteristics of a large group are likely to reflect those of the entire population.
B) It is easier to accurately predict the number of claims for a group than for an individual.
C) When all group members pay the premium, the problem of moral hazard is reduced.
D) When all group members pay the premium, the problem of adverse selection is reduced.

Question 52

If a doctor knows that an insurance company will pay for most of a patient's bill,the doctor has more of an incentive to require additional medical procedures and tests,even if the patient may not require them.This is an example of

A) moral hazard.
B) the principle-agent problem.
C) asymmetric information.
D) adverse selection.

Question 53

Which of the following is not an advantage of risk pooling?

A) By insuring large groups as opposed to individuals, health insurance providers reduce adverse selection.
B) It gives very sick people in the group the same access to health care and to pay the same premiums as healthy individuals.
C) It is easier for an insurance company to estimate the average number of claims likely to be filed under a group policy than it is to predict the number of claims likely to be filed under an individual policy.
D) Individuals who are insured and therefore do not have to pay the full cost of health care services may be inclined to over-use those services.

Question 54

Health insurance companies impose deductibles on policies and co-payments on claims

A) to increase sales.
B) to reduce moral hazard problems.
C) to reduces sunk costs.
D) to increase prices.

Question 55

What is the principal-agent problem?

A) It is a problem caused by a person (principal) who hires an agent to act on his behalf but is unwilling to delegate authority to the agent to carry out the task in the best possible way.
B) It is a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them.
C) It is a problem of the power system of boss and subordinate where the boss (principal) exerts influence over his subordinates (agents) using punishment or threat.
D) It is a problem that exists when a person (principal) has more information about the task than the agent he hires to perform the task.

Question 56

In the principal-agent relationship,the agent is

A) the owner of a resource that has hired another party to act on his behalf.
B) the person who is placed in control over resources that are not his own, with a contractual obligation to use these resources in the interests of some other party.
C) the person who is placed in control over resources that are not his own and agrees to compensate the resource owner in the event of outcomes that do not satisfy the resource owner.
D) the person who places his resources in professional hands in exchange for the professional's promise to act on the resource owner's behalf.

Question 57

When people who buy insurance change their behavior after the purchase because they are protected from loss by the insurance,the insurance market is said to face the problem of

A) moral hazard.
B) adverse selection.
C) asymmetric information.
D) economic irrationality.

Question 58

If a state requires all drivers to purchase auto insurance,insurance companies still face the problem of

A) correctly pricing their insurance.
B) sunk costs.
C) adverse selection.
D) excess demand for their insurance.

Question 59

In markets with asymmetric information,

A) moral hazard causes adverse selection which in turn causes asymmetric information.
B) adverse selection causes moral hazard which in turn causes asymmetric information.
C) asymmetric information causes moral hazard and then it causes adverse selection.
D) asymmetric information causes adverse selection and then it causes moral hazard.

Question 60

The cost of group health insurance is lower than if an individual buys a policy on his own because

A) the problem of adverse selection is reduced.
B) moral hazard costs of a group tend to move to a low average.
C) it is easier for the company to deny claims from a large group.
D) insuring a group eliminates the problem of buyers having more information than the seller.

Question 61

Suppose you see a 2006 Scion xB Sport Wagon advertised in the local newspaper for $8,500.If you knew the car was reliable,you would be willing to pay $10,000 for it.If you knew the car was unreliable,you would only be willing to pay $5,500 for it.Under what circumstances should you buy the car?

Question 62

The Congressional Budget Office estimates that the payments to settle malpractice lawsuits and the premiums doctors pay for malpractice insurance account for ________ of health care costs in the United States.

A) between 20 and 30 percent
B) roughly half
C) less than 1 percent
D) a vast majority

Question 63

What is adverse selection?

Question 64

By the year 2019,health care's share of gross domestic product in the United States is projected to

A) return to its 1995 level.
B) have declined to only 6.5 percent.
C) be more than three times as high as it was in 1965.
D) reach a level of 75 percent.

Question 65

Vaccinating people against a communicable disease such as influenza not only reduces the chances that the person vaccinated will catch the disease but also reduces the probability that an epidemic of the disease will occur.Which of the following statements is true?

A) Reducing the chances that the person vaccinated will catch the disease is a private cost while reducing the probability of an influenza epidemic is a social benefit.
B) Vaccinating people against communicable diseases yields private benefits in excess of social benefits.
C) Reducing the chances that the person vaccinated will catch the disease is a private benefit while reducing the probability of an influenza epidemic is a social benefit.
D) The benefits of the influenza vaccination outweigh the costs.

Question 66

The situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction is known as asymmetric information.

Question 67

Suggest three ways by which health insurance companies can reduce adverse selection?

Question 68

Compared to other high-income countries,health care spending per person in the United States has been

A) growing at a faster rate.
B) declining at a faster rate.
C) growing at approximately the same rate.
D) declining at approximately the same rate.

Question 69

In the United States,the bulk of health care spending is paid by health insurance companies.Such a system is also called a third-party payer system where consumers of health care pay a nominal fee and the rest are paid by the health insurance provider.Why might such a system lead to an inefficient outcome?

A) Health insurance companies have an incentive to control cost and therefore tend to deny consumers many cutting edge medical treatments.
B) Consumers have an incentive to over-consume health care services because they pay prices well below the cost of providing these services.
C) Physicians concerned that insurance companies may not approve payments tend not to order expensive tests for their patients.
D) Consumers fearing that excessive use of health care services may lead to a rise in insurance premiums tend to under-consume health care services.

Question 70

In the United States,total health care spending per person has been ________,and out-of-pocket spending on health care per person has been ________.

A) rising; rising
B) rising; falling
C) falling; rising
D) falling; falling

Question 71

How do current tax laws in the United States favor employer-based health care insurance?

A) Individuals who receive health insurance benefits are allowed to deduct the value of these benefits from their taxable income.
B) Employers who provide health insurance benefits are reimbursed by the government and are not taxed on these reimbursements.
C) Individuals who receive health insurance benefits do not pay taxes on the value of these benefits.
D) Health insurance companies that provide insurance to employers are subject to a lower tax rate than those insurance companies that provide insurance to private individuals.

Question 72

Health insurance companies impose deductibles on policies and co-payments on claims to reduce the problem of adverse selection.

Question 73

One effect of adverse selection in a market is that the equilibrium quantity of the product may
be smaller than it would have been if there were no information problems.

Question 74

Moral hazard refers to the actions people take after they have entered into a transaction that make the other party to the transaction worse off.

Question 75

Suppose a large firm allows its employees to choose whether to participate in its health insurance plan.The firm is trying to decide between two plans: Plan I has a low monthly premium but a high deductible,and Plan II has a high monthly premium but a low deductible.Under which plan is adverse selection likely to be a bigger problem?

A) Plan I because it is likely to draw participants who expect high medical costs. This group expects to consume much health care services and therefore prefer low deductibles.
B) Plan II because it is likely to draw participants who expect high medical costs. Healthy individuals who do not expect to consume much health care services will not be willing to pay the high premiums.
C) Plan I because it is likely to draw the relatively healthy employees who do not expect to spend much on health care. Because the monthly premiums are low, the insurance company has to bear a bigger financial burden in the event of serious illnesses.
D) Plan II because it is likely to draw employees who tend to over-consume health care services because of the low deductible. Insurance companies are likely to end up paying out more claims than the premiums they collect.

Question 76

If a state requires all drivers to buy health insurance,the problem of adverse selection is eliminated.

Question 77

Based on the current rate of growth,health care spending as a percentage of GDP through Medicare,Medicaid,and other U.S.government programs is expected to

A) stabilize within the next 20 years.
B) account for a majority of spending as a percentage of GDP within 5 years.
C) slow down during this decade.
D) more than double over the next 40 years.

Question 78

What is moral hazard?

Question 79

What is an externality? Explain how someone receiving a meningitis vaccination is an example of an externality in the market for health care.

Question 80

A doctor pursuing his own interests rather than the interests of his patients is an example of the principal-agent problem.