Transcript
Medical Care
Costs Out of Control?
True/False Questions
1. The quantity of health care provided is said to be excessive if at that quantity the marginal benefits of health care are greater than the marginal costs of health care.
ANSWER: F
2. A third-party payment is a payment made directly to the provider of a good or service by someone other than the buyer.
ANSWER: T
3. Health care expenditures as a percentage of GDP have increased substantially over the past fifty years.
ANSWER: T
4. “Cost disease” theory asserts that the technologicallyprogressive, capitalintensive sector that exhibits slow growth in labor productivity.
ANSWER: F
5. “Cost disease” theory asserts that the laborintensive sector that exhibits rapid growth in labor productivity.
ANSWER: F
6. The threat of potential competitors probably helps to limit physician-induced demand.
ANSWER: T
7. Defensive medicine is the main culprit in excessive spending on health care.
ANSWER: F
8. Experience rating is the source of significant savings in the health care industry.
ANSWER: F
9. Excessive health care caused by physician-induced demand may be mitigated by the growing practice of third-party payers requiring second opinions before agreeing to pay for medical care.
ANSWER: T
10. Managed care is health care that is reviewed by someone other that the patient or provider to determine whether the right services are being provided and whether the cost of provision in minimized.
ANSWER: T
11. Managed care increases the intensity of the health care provided.
ANSWER: F
12. Federal tax exemptions for health insurance benefits can cause the individual's bottom line cost of health insurance to be negative.
ANSWER: T
13. Medicare is the federal government's program of health insurance for people who have low incomes.
ANSWER: F
14. Medicare is structured just the opposite of an optimal policy, and is generous in covering short stays and routine care.
ANSWER: T
15. The income elasticity of demand is a measure of the change in the quantity demanded of a specific good or service as a result of a change in income, expressed in percentages.
ANSWER: T
16. The proponents of a voucher system argue that such a system would increase competition in the health care industry.
ANSWER: T
17. The tax exemption for health insurance has been a major factor in increasing the availability of low-cost insurance.
ANSWER: F
18. Life expectancy at birth has increased form 50 years in 1900 to 77 today.
ANSWER: T
19. A lot of medical care, in U.S., is provided in situations where it is of little or no value.
ANSWER: T
20. Critics of vouchers say they may not work as intended because recipients may make poor choices of health insurers or providers.
ANSWER: T
21. Federal tax exemption for employer-provided health insurance increases the demand for health insurance, and thus adds to the excess demand for health services.
ANSWER: T
Multiple-Choice Questions
1. A third-party payment refers to:
a. a payment made by a consumer for a good or service obtained on credit.
b. a payment made to the provider of a good or service by a party other than the buyer.
c. the payment made for used goods and services.
d. the fact that insurance companies prefer to pay for the care rendered by third parties in institutional settings.
ANSWER: b
2. Which of the following is not a contributing factor in the increasing of the quantity of health care over time?
a. The aging of the population.
b. The relatively low income elasticity of demand for health care.
c. The increases in insurance coverage.
d. Technological change.
ANSWER: b
3. The principal "third parties" in the market for health care are:
a. private insurance companies and government agencies.
b. private insurance companies and business firms.
c. government agencies and business firms.
d. those who are self-insured and private insurance companies.
ANSWER: a
4. The “cost disease” theory implies that:
a. The capitalintensive sector exhibits rapid growth in labor productivity.
b. The laborintensive sector exhibits slow growth in labor productivity.
c. Slower growth in productivity in the laborintensive sector results in faster increases in prices in this sector.
d. All of the above.
ANSWER: d
5. The national health expenditure (NHE) relative to gross domestic product (GDP) can be expressed as:
a. (PAGS X QAGS) / (PHC X PHC)
b. (QAGS X QHC) / (PAGS X PHC)
c. (PHC X QHC) / (PAGS X QAGS)
d. (PHC X PAGS) / (QHC X QAGS)
ANSWER: c
6. The national health expenditure (NHE) relative to gross domestic product (GDP):
a. will increase if the average price of medical care increases relative to the average price of all other goods and services.
b. will increase if the average quantity of medical care increases relative to the average quantity of all goods and services.
c. is equal to (PHC X QHC) / (PAGS X QAGS)
d. All of the above are correct.
ANSWER: d
7. All of the following help to explain why the quantity of health care provided by the system may be excessive except:
a. third-party payments.
b. physician-induced demand.
c. global budgeting.
d. defensive medicine.
ANSWER: c
8. Physician-induced demand arises because:
a. consumers lack information about the effectiveness of various health care alternatives.
b. consumers often do not bear the full cost of their health care due to the existence of third party payments.
c. of the lack of ability to substitute capital for labor in the production of health care.
d. All of the above.
ANSWER: a
9. The physician practice of prescribing ineffective health care in order to increase wealth is known as:
a. physician sovereignty.
b. physician-induced demand.
c. protective medicine.
d. defensive medicine.
ANSWER: b
10. Physician-induced demand may be mitigated because of:
a. the inability of physicians to limit the entry of competitors.
b. consumer ignorance about alternative treatments.
c. fewer third-party payers requiring second opinions.
d. the fact that patients rarely have a priori expectations concerning their treatment.
ANSWER: a
11. The physician practice of prescribing medical procedures in order to avoid malpractice suits is known as:
a. physician sovereignty.
b. physician-induced demand.
c. protective medicine.
d. defensive medicine.
ANSWER: d
12. Income elasticity of demand for health care:
a. is the change in the quantity demanded of health care as a result of a change in income expressed in percentages.
b. exceeds 1 for healthcare.
c. is equal to (% change in QHC) / (% change in income).
d. All of the above are correct.
ANSWER: d
13. New technology normally increases costs because:
a. it increases the "intensity" of care.
b. hospitals, especially in metropolitan areas, must increase spending on technology in order to get rid of excess capacity.
c. the fact that technology does little to increase the quality of health care.
d. it provides less opportunities for providing more services to patients.
ANSWER: a
14. All of the following are sources of benefits from medical advances, except:
a. reduced mortality.
b. increased life expectancy.
c. greater morbidity.
d. enhanced quality of life.
ANSWER: c
15. Experience rating does not generally cause people to make choices that reduce their use of the health care system because:
a. the use of partial-cost payments offsets any incentives people have to decrease their use of the health care system.
b. government programs such as Medicaid and Medicare offset any incentives people have to decrease their use of the health care system.
c. most of the individual variation in the use of health care comes from factors beyond individual control.
d. most of the individual variation in the use of health care arises because of the way insurance companies structure payments to providers.
ANSWER: c
16. The federal income tax exemption for health insurance:
a. makes employees worse off because their net wages are lowered when employers pay for health insurance.
b. decreases in value as the marginal tax rate increases.
c. can cause the individual's bottom line cost of health insurance to be negative.
d. causes the quantity of medical care demanded to fall.
ANSWER: c
17. The cumulative effect of the federal income tax exemption for health insurance could be quite large because:
a. the exemption causes a secondary effect that causes the quantity of medical care demanded to decrease.
b. the exemption causes a secondary effect that causes the quantity of medical care demanded to increase.
c. employers do not try to find the most efficient health insurance providers as a result of the exemption.
d. the exemption decreases consumers' incentives to seek out second opinions on some types of treatments.
ANSWER: b
18. The government's program of health insurance for individuals 65 or older is known as:
a. Medicare.
b. Medicaid.
c. Supplemental Security Medical Care.
d. Preferred Provider Insurance.
ANSWER: a
19. Which of the following statements is correct?
a. Medicare is like private insurance in that patients are required to make only partial-cost payments.
b. Partial-cost payments under Medicare are smaller than for privately-insured health care.
c. The structure of Medicare follows very closely the structure of insurance described under optimal insurance theory.
d. There is no cap on the number of hospital days for which Medicare will pay.
ANSWER: a
20. Which of the following statements is correct?
a. About 35% of the U.S. population is without health insurance.
b. Workers at small firms have a greater probability of not having insurance.
c. Most of the uninsured are not connected to the workforce.
d. Health insurance is not available to most small firms.
ANSWER: b
21. Which of the following statements is correct?
a. The Canadian government will pay for an unlimited amount of health care.
b. Because of Canadian government expenditure limits, there is often excess supply of health services.
c. Because of Canadian government expenditure limits, there is often excess demand for health services.
d. Canadians tend to pay high partial cost prices.
ANSWER: c
22. Of the following, it is likely that the largest source of excessive spending on health care is:
a. physician-induced demand.
b. defensive medicine.
c. too rapid growth in medical technology.
d. third-party payments.
ANSWER: d
23. Proponents of a voucher system argue that:
a. it would cause consumers of health care to make better health care choices.
b. it would cause consumers of health care to bear a smaller part of the cost of health care services they consume.
c. vouchers would eliminate competition for providers, thereby lessening the confusing choices that currently face consumers of health care services.
d. vouchers could increase the number of suppliers of medical services, thereby driving down costs.
ANSWER: a
24. A system in which insurance coverage and the delivery of medicine are integrated into a single organization is known as:
a. a Preferred Provider Organization.
b. an Independent Practice Association.
c. a health maintenance organization.
d. an Independent Provider Organization.
ANSWER: c
25. In a health maintenance organization (HMO), cost savings occurs because:
a. doctors' incomes are determined by the amount of services they provide.
b. doctors' agree to provide all the medical care required for a set amount.
c. doctors' profits increase as the amount of services provided increases.
d. doctors' profits decrease as the amount of services provided decreases.
ANSWER: b
26. A system in which doctors and hospitals agree to charge an organization's members a set fee for services is known as:
a. a Preferred Provider Organization.
b. an Independent Practice Association.
c. a health maintenance organization.
d. an Independent Provider Organization.
ANSWER: a
27. Which of the following are policy suggestions for reforming the health care system?
a. eliminating the federal tax exemption for health insurance.
b. greater reliance on managed care.
c. increasing partial-cost payments.
d. all of the above.
ANSWER: d
Critical Thinking Multiple Choice
28. Suppose that the risk of dying in an automobile accident is reduced by 1 in 10,000 through the use of front seat air bags and that 10,000 auto buyers choose to purchase these air bags as an option at a price of $250. What is the implicit value of a life to these buyers?
a. $2 million.
b. $2.5 million.
c. $3 million.
d. $250,000.
ANSWER: b
29. Suppose that the risk of dying from head injury is reduced by 1 in 20,000 through use of helmets, and that 20,000 motorcycle riders choose to purchase helmets at a price of $150. What is the implicit value of a life to these buyers?
a. $2 million.
b. $2.5 million.
c. $3 million.
d. $250,000.
ANSWER: c
30. What is the present value of $100 paid to you a year from now if the rate of interest is 5%?
a. $95.24
b. $95.00
c. $5.25
d. $105.50
ANSWER: a
31. What is the total present value of two payments of $100 paid to you, one a year from now, and the second two years from now, if the rate of interest is 5%?
a. $190.50
b. $185.94
c. $210.93
d. $200.88
ANSWER: b
32. Suppose Paul's employer pays a health insurance premium of $2555 per year. Paul's marginal tax rate is 30 percent. What is the policy worth to Paul?
a. $766.50.
b. $1788.50.
c. $3321.50.
d. $3650.00.
ANSWER: d
33. Suppose that the cost of a new treatment for HIV is $20,000 per year, and that it increases the life expectancy by 5 years. If the discount rate is 4 percent, what is the present value of the costs of treatment to a 40-year-old male who has a life expectancy of 45 years without treatment.
a. $96,153.85
b. $85,155.50
c. $73,181.47
d. $100,000
ANSWER: c
34. Suppose that a year of life is worth $100,000, and that the cost of a new treatment for HIV is $30,000 per year, and that it increases the life expectancy by 3 years. If the discount rate is 3 percent, is the HIV treatment worth the cost to a 30-year-old male who expects to live for 2 more years without treatment.
a. No, since the present value of costs are greater than the present value of benefits.
b. Yes, since the present value of benefits are greater than the present value of costs.
c. Yes, since the present value of benefits are equal to the present value of costs.
d. Not enough information is provided to make a determination.
ANSWER: a
35. At the current level of consumption, the marginal social benefit of health care is $300 while the marginal social cost if $450. Based on this information:
a. the quantity of health care should remain unchanged.
b. the quantity of health care should be increased.
c. the quantity of health care should be decreased.
d. the quantity of health care is currently at the efficient level.
ANSWER: c
36. Suppose that at current consumption levels the MSB of an additional vaccination against chicken pox is $35 while the MSC is $30. We know that:
a. the quantity of vaccinations should remain unchanged.
b. the quantity of vaccinations should be increased.
c. the quantity of vaccinations should be decreased.
d. the quantity of vaccinations is currently at the efficient level.
ANSWER: b
37. Dr. Smith orders Robert to undergo medical tests of questionable effectiveness in order to increase his income. This is an example of:
a. physician sovereignty.
b. physician-induced demand.
c. protective medicine.
d. defensive medicine.
ANSWER: b
38. Even though Joan knows there is no possibility of her being pregnant, Dr. Jones prescribes a pregnancy test for Joan before putting her on medication. He does this in order to avoid any potential lawsuits that might arise. This is an example of:
a. physician sovereignty.
b. physician-induced demand.
c. protective medicine.
d. defensive medicine.
ANSWER: d
39. Suppose that a year of life is worth $150,000 and that a new treatment for diabetes increases life expectancy for a 40year old woman by 2 years. Suppose that life expectancy without treatment is 75 and that the discount rate is 3 percent. Determine the present value of the increased life expectancy resulting from the new treatment.
a. $300,000
b. $194,000
c. $102,002
d. $51,755
ANSWER: c
Essay and Discussion Questions
1. Carefully explain what is meant by "excessive spending" on health care.
The student should discuss the concepts of marginal social costs and marginal social benefits. They should make the argument that "excessive spending" occurs whenever the marginal social cost exceeds the marginal social benefit. In this case, society is giving up more for the additional unit than they get in benefits.
2. Suppose that a year of life is worth $100,000, and that the cost of a new treatment for HIV is $30,000 per year, and that it increases the life expectancy by 3 years. If the discount rate is 3 percent, is the HIV treatment worth the cost to a 30-year-old male who expects to live for 2 more years without treatment.
The present value of benefits are:
PVB= (100,000/1.03)3 + (100,000/1.03)4+(100,000/1.03)5= $266,623
and the present value of costs are:
PVC= (30,000/(1.03)0 )+ (30,000/(1.03)1 )+ (30,000/(1.03)2 )+ (30,000/(1.03)3 )+ (30,000/(1.03)4 )= $141,513
Since the present value of costs exceed the present value of benefits, this treatment is not worth the costs.
3. What factors are the largest contributors to excess health care spending?
While the authors enumerate several potential contributors (third-party payments, physician-induced demand, defensive medicine, technological change, and the federal income tax exemption for health insurance), the student should recognize that third-party payments and the federal income tax exemption for health insurance are probably the major contributors to excessive health care spending. A brief explanation as to why physician-induced demand, defensive medicine, and technological change may be only minor contributors is in order.
4. What factors work to limit physician-induced demand?
The student should discuss factors such as physicians' inability to limit competitors, the a priori expectations of consumers, the growing practice of third-party payers requiring second opinions, limits on the amount of work physicians wish to create for themselves, and physicians' ethics.
5. Discuss the impact of the federal income tax exemption on the health care system.
The student should discuss the fact that this exemption lowers the individual's bottom line cost for health care insurance. This increases the quantity of health care insurance demanded. As the quantity of health care insurance consumed increases, there is a secondary impact as this leads to an increase in the quantity of health care consumed.
6 . Discuss the shortcomings of Medicare benefit design that contribute to the provision of an inefficiently large quantity of health care.
The student should recognize that because Medicare is structured just the opposite from how an optimal policy should be, there is an incentive for consumers to spend too much on routine health care.
7 . What policies might be undertaken in an attempt to increase the efficiency of the health care system?
The student should discuss the options of raising partial-cost payments and eliminating the federal income tax deduction. In addition, the cost savings that can accrue as greater reliance is placed on managed care systems should also be discussed.
Problems
1 . Suppose Joe's marginal tax rate is 20 percent. His employer pays a health insurance premium of $2000 per year for Joe. What is this insurance worth to Joe?
Joe would have to earn enough money to pay for both the insurance premium and the taxes on his extra income. In other words, after paying taxes, Joe must have $2000 left to purchase the insurance. Let X be the amount of income Joe must earn. Then, $2000 = X -0.20X or $2000 = 0.80X. Solving for X, we have $2000/0.80 = X, or $2500 = X. Thus, the insurance is worth $2500 to Joe.
2 . a. Suppose an employer is paying $1000 per year for an insurance policy for James. Suppose James's marginal tax rate is 28 percent. How much will he need to earn to have a $1000 after tax?
He would have to earn $1388.89 ($1000 = $1388.89 - ($1388.89 x .28)) in order to have $1000 after taxes to pay for the premium himself.
b. What is the value of the exemption to James?
The value of the exemption to James is $388.89.
c. Suppose James expects to get back $800 in benefits. What is the net cost of insurance to James?
The net cost of insurance (the difference between the premium and benefits) is $1000 - $800 or $200. James's bottom line cost is the difference between the net cost of the insurance, $200, and the value of the insurance premium, $388.89. Thus, the net cost is a negative $188.89.
3 . Suppose that a year of life is worth $150,000 and that a new treatment for diabetes increases life expectancy for a 40year old woman by 2 years. Suppose, further, that the treatment will cost $50,000 in present value per woman. If the discount rate is 3 percent (i = 0.03) determine if this treatment is worth the cost.
The treatment would be worth the cost if the present value of benefits exceed or equal the present value of costs. The present value of treatment cost is given at $50,000 per woman. The present value of benefits at age 40 is calculated by the following equation:
PVLY40 = FVLYt / (1+i)t40
where PVLY is the present value of a life year at age 40, FVLY is the future value of a life year in year t, (1+i)t40 is the discount factor, and i is the discount rate. Let us assume that life expectancy without treatment is 75 years, thus, treatment would lead a life expectancy of 77. The present value of benefits at age 40 is calculated as follows:
PVLY40 = FVLY76 / (1+0.03)7640 + FVLY77 / (1+0.03)7740
and
PVLY40 = $150,000 / (1+0.03)36 + $150,000 / (1+0.03)37 = $51,755 + $50,247 = $102,002
Thus, the total present value of benefits is $102,002, which is greater than the present value of costs for two years, $100,000, by $2,002. The treatment is worth the cost.
