Economics of Healthcare: Key Concepts and Applications
Old Exams: Healthcare Economics
The government passes a tax that results in an increase in the price of cigarettes from $4 a pack to $5. Since the price elasticity of demand for cigarettes is between -0.3 to -0.7, government revenue will increase.
Suppose the price elasticity of demand for cigarettes is -.45, on average. A 1 percent increase in price will result in a 0.45 percent decrease in the quantity of cigarettes demanded.
Utility Maximization
Mainstream economic theory hypothesizes that individuals (consumers) make decisions by maximizing utility.
A report comes out from the government demonstrating conclusively that consumption of beer increases life expectancy by upwards of 5 years. At the same time as this report comes out, a blight on Hops destroys half of the world’s Hop crop. What will happen in the market for beer? The equilibrium price would increase, but the impact on the amount sold in the market would be ambiguous.
Consumer Choice
George consumes two goods, milk and cookies. He has maximized his utility given his income. Milk costs $3 per gallon and he consumes it to the point where the marginal utility he receives from milk is 12. Cookies cost $4 per bag and the relationship between the marginal utility that George gets from eating a bag of cookies and the number of bags he eats per month is as follows: 2[MU(m)/P(m)=MU(c)/P(c) or 12/3=16/4.
An example of an input into the health production function is exercise, while an example of an output of the health production function is healthy days per year.
Regression Analysis
Suppose a researcher wants to know how the daily number of cigarettes smoked by pregnant women affects the birthweight (in ounces) of their babies. The researcher estimates the following regression model, and the results are presented below. When a pregnant woman smokes 1 more cigarette per day throughout pregnancy, the birthweight of her child is expected to decrease by about 0.5 of an ounce, on average.
Health Statistics
Total estimated population: 976,000
Total heart disease cases reported in 2010: 18,320
Total heart disease cases reported from 2000 – 2009: 254,000
Total deaths from heart disease reported from 2000 – 2009: 19,200
What is the incidence of heart disease in 2010? 1877 (18320/976000)
What is the prevalence of heart disease in 2010? 25934 [254000+18320-19222/976000]
Health Insurance Experiment
What is the main finding of the RAND Health Insurance Experiment? More cost-sharing leads to less use of healthcare services.
Which of the following would you expect to have the smallest (in absolute value) price elasticity of demand? Primary care services.
The authors of “US Healthcare: Nothing More than a Classic Market Failure” argue that the following explains much of the upward pressure on the price of healthcare in the US: existence of an intermediary insurance market between buyers and sellers of healthcare.
Which graph below depicts what happens in the market for healthcare when a third-party insurer steps in, according to the outcome of the experiment? A (Demand shifts up and to the right).
Which of the following puts upward pressure on the price of healthcare in the US? Having for-profit health insurance companies.
Demand curves for healthcare are derived from the utility maximizing process when the price of healthcare changes b. tangencies between indifference curves and budget constraints.
According to the documentary, a significant problem in a number of countries is inability to pay for the healthcare system.
According to the documentary, in England (choose all that apply): doctors get paid very poorly
Affordable Care Act (ACA)
The Affordable Care Act calls for an individual mandate, which means that consumers must get insurance or pay a tax, the greater of a flat tax or a percent of income.
Under the Affordable Care Act (choose all that apply), employers with more than 50 employees must offer insurance or pay a tax; employees can choose whether to take insurance that is offered by an employer; if an employee rejects insurance offered by an employer, the employer must pay a fine.
Moral Hazard and Adverse Selection
Patients who have low-deductible, low co-payment insurance will demand any and all pharmaceuticals and other treatments that promise any benefit at all, net of the risks and side effects of the treatment, without regard to cost. This is an example of moral hazard.
Smokers may be more likely to buy insurance, or may tend to buy larger amounts, than non-smokers, thereby raising the average mortality of the combined policyholder group above that of the general population. This is an example of adverse selection.
Market Dynamics
Bike retailers have reported significant increases in bike sales by the public since the advent of London’s bike hire program, which introduced a large number of relatively cheap and easy-to-rent. The law of demand.
Periodically reminding health care providers of their own prescribing behavior, while displaying the behavior of the best-performing peers in their region and citing the national recommended guidelines, will likely decrease inappropriate antibiotics prescriptions. Social norms.
QALY Calculation
Suppose Amy, who has heart disease, can expect to live another 20 years without intervention. Without medication, she places a value of 0.55 on her remaining years. Thus, her 20 remaining years have a QALY value of 20 * 0.55 = 11
Refer to the previous question. Now suppose Amy is placed on medication, and she can expect to live for 30 more years (instead of 20). She values her remaining years at a quality level of 0.85. The treatment resulted in a gain of 14.5 QALYs [30(0.85) = 25.5 – 11 = 14.5].
Insurance Market
The insurance experiment, in which teams acted as sellers and buyers, showed that adverse selection occurs when sellers are not allowed to charge different prices to different types of buyers.
Insurers try to minimize moral hazard by charging deductibles and co-pays.
Which of the following is NOT true about the relationship between health status and insurance coverage? The evidence suggests that lack of insurance negatively impacts health for all socioeconomic groups.
The Affordable Care Act decreases Medicare reimbursements to hospitals over time. The ACA was counting on the ability of hospitals to offset this by increasing productivity.
Suppose 12 buyers 12 sellers – 2 buys reserv pri of 15, 5 $10, 3 $7, 2 $7. 4 sellers pro cost 2, 3$6, 2$9, 3$14. Q*=7, P*=7,9
