MHA 710 - HEALTHCARE ECONOMICS - EXAM 3 2025 UPDATED ACTUAL EXAM
WITH CORRECT SOLUTIONS.
Question 1
In order to be a successful price discriminator, a provider must have a degree of market power
(depicted by a downward-sloping demand curve) and meet what other condition(s)?
A) Customers cannot know that different prices are being charged.
B) Markets must be segmentable, identifying differences in ability to pay.
C) Demand for services must be relatively price elastic.
D) Profitable service expansion opportunities must be limited.
E) The provider must have excess capacity to accommodate the extra business.
Correct Answer: B) Markets must be segmentable, identifying differences in ability to pay.
Rationale: Price discrimination occurs when a seller charges different prices to different
consumers for the same service, not based on cost differences but on differences in the
consumers' willingness or ability to pay (price elasticity of demand). For this to work, the
provider must be able to segment the market so that low-price buyers cannot resell the
service to high-price buyers (arbitrage), and they must be able to identify which groups
have less elastic demand (and can thus be charged more).
Question 2
Legislation considered by Congress to restrict legal immigration would:
A) surprise many policymakers because Congress finds it difficult to agree on much of anything
regarding immigration.
B) improve employment prospects for native-born Americans.
C) have little effect on medical markets, as so few physicians practicing medicine in the United
States are foreigners.
D) raise the costs of operating in many of the nation's rural and inner-city hospitals.
E) allow more Americans trained abroad to compete for openings in United States' residency
programs.
Correct Answer: D) raise the costs of operating in many of the nation's rural and inner-city
hospitals.
Rationale: The U.S. healthcare system relies heavily on International Medical Graduates
(IMGs), particularly in underserved areas. Rural and inner-city hospitals often struggle to
attract U.S.-born physicians and frequently utilize J-1 visa waivers to staff their facilities.
Restricting legal immigration would decrease the supply of these physicians, forcing these
hospitals to increase wages significantly to attract domestic talent or potentially face service
closures, thereby increasing the overall cost of operations.
Question 3
Physicians who own their own diagnostic testing facilities tend to order more tests, charge higher
fees for them, and have higher total bills to patients. This practice of self-referral is an example
, 2
of:
A) cognitive dissonance.
B) physician-induced demand.
C) moral hazard.
D) adverse selection.
E) res ipsa loquitur.
Correct Answer: B) physician-induced demand.
Rationale: Physician-induced demand (PID) occurs when a physician uses their
informational advantage over the patient to suggest more care than the patient would have
chosen if the patient had the same information as the physician. When a physician has a
financial interest in the facility (self-referral), the incentive to maximize income aligns with
ordering additional tests, shifting the patient's demand curve to the right.
Question 4
Which of the following statements is true concerning the trend in community hospital care
between inpatient and outpatient services since the mid-1980s?
A) Both inpatient and outpatient services have been declining.
B) There has been no noticeable trend in either inpatient or outpatient services.
C) Both inpatient and outpatient services have been growing.
D) Outpatient services have been growing, while inpatient services have been declining.
E) Outpatient services have been declining, while inpatient services have been growing.
Correct Answer: D) Outpatient services have been growing, while inpatient services have
been declining.
Rationale: Since the mid-1980s, the introduction of the Prospective Payment System (PPS)
and Diagnosis-Related Groups (DRGs) created strong incentives for hospitals to reduce
lengths of stay. Coupled with technological advancements in minimally invasive surgery
and anesthesia, many procedures that previously required overnight stays shifted to the
outpatient setting. This resulted in a steady decline in inpatient "bed days" and a
simultaneous boom in hospital-based and freestanding outpatient clinics.
Question 5
The amount that Medicare pays a hospital for treating a Medicare patient is determined:
A) at the point when the diagnosis is made.
B) at the time of admission to the hospital.
C) before the patient sees a physician.
D) after the hospital bill is reviewed by Medicare auditors.
E) after medical services are provided.
Correct Answer: A) at the point when the diagnosis is made.
Rationale: Medicare uses the Prospective Payment System, where payment is based on
, 3
Diagnosis-Related Groups (DRGs). This means the reimbursement amount is fixed based
on the patient's clinical diagnosis and expected resource consumption, rather than the
actual costs or charges incurred during the stay. Once the diagnosis is established and
coded, the hospital knows the amount it will receive, incentivizing efficiency.
Question 6
Compared to the not-for-profit organizational form, the for-profit environment:
A) allows for the transfer of assets.
B) lacks a profit motive.
C) gives shareholders higher returns on their investment.
D) provides patients with higher quality of care.
E) does not provide charity care.
Correct Answer: A) allows for the transfer of assets.
Rationale: The defining legal difference between for-profit and not-for-profit entities is the
"non-distribution constraint." Not-for-profits cannot distribute "profits" to individuals or
shareholders; any surplus must be reinvested in the mission. For-profits, however, have
equity holders and the legal ability to transfer assets, sell ownership, and distribute
dividends, which provides greater access to capital markets.
Question 7
What is the most significant cost of attending medical school?
A) Books and incidentals
B) Room and board
C) Tuition and fees
D) The income foregone
E) Student loan interest
Correct Answer: D) The income foregone
Rationale: In economic terms, "opportunity cost" is the value of the next best alternative.
For medical students, while tuition is high, the "income foregone" (the salary they could
have earned working a full-time job during the four years of medical school and
subsequent low-paid residency years) typically exceeds the direct out-of-pocket costs of
tuition and fees.
Question 8
Using the physician-control model to explain hospital behavior leads to which of the following
conclusions?
A) Other medical inputs tend to be overused to maximize physicians' productivity.
B) All investment decisions will be based on optimal resource use.
C) The use of operating rooms will be maximized with little excess capacity.
, 4
D) Physicians will strive to use the nursing staff efficiently.
E) The hospital will prioritize cost-minimization above all else.
Correct Answer: A) Other medical inputs tend to be overused to maximize physicians'
productivity.
Rationale: The physician-control model assumes that the hospital is run for the benefit of
the medical staff. To maximize the physician's own productivity and income, they will
demand that the hospital provide an abundance of complementary inputs—such as nursing
staff, residents, and the latest technology—at no cost to the physician, even if those inputs
are not used efficiently by the hospital itself.
Question 9
Economies of scale exist when:
A) long-run average costs decline as output increases.
B) long-run average costs increase as output increases.
C) long-run average costs are constant.
D) short-run average costs decline.
E) short-run average costs increase.
Correct Answer: A) long-run average costs decline as output increases.
Rationale: Economies of scale occur when the Long-Run Average Cost (LRAC) curve is
downward sloping. This means that as a hospital or clinic increases its volume of services
(output), the cost per unit of service decreases. This is often due to the ability to spread
fixed costs (like expensive MRI machines or administrative overhead) over a larger number
of patients.
Question 10
Which of the following statements about the distribution of physicians among specialties is true
in the United States?
A) There are twice as many generalists as there are specialists.
B) The majority of physicians specialize in general/family practice.
C) There are twice as many specialists as there are generalists.
D) The specialty distribution in the United States is similar to that of the rest of the world.
E) Specialist numbers are declining relative to primary care.
Correct Answer: C) There are twice as many specialists as there are generalists.
Rationale: In the U.S., roughly one-third of physicians are in primary care (generalists),
while two-thirds are specialists. This is a higher ratio of specialists than in many other
developed nations (like the UK or Canada), where the split is often closer to 50/50. This is
driven by higher reimbursement rates for procedures and the prestige associated with
specialty medicine.
WITH CORRECT SOLUTIONS.
Question 1
In order to be a successful price discriminator, a provider must have a degree of market power
(depicted by a downward-sloping demand curve) and meet what other condition(s)?
A) Customers cannot know that different prices are being charged.
B) Markets must be segmentable, identifying differences in ability to pay.
C) Demand for services must be relatively price elastic.
D) Profitable service expansion opportunities must be limited.
E) The provider must have excess capacity to accommodate the extra business.
Correct Answer: B) Markets must be segmentable, identifying differences in ability to pay.
Rationale: Price discrimination occurs when a seller charges different prices to different
consumers for the same service, not based on cost differences but on differences in the
consumers' willingness or ability to pay (price elasticity of demand). For this to work, the
provider must be able to segment the market so that low-price buyers cannot resell the
service to high-price buyers (arbitrage), and they must be able to identify which groups
have less elastic demand (and can thus be charged more).
Question 2
Legislation considered by Congress to restrict legal immigration would:
A) surprise many policymakers because Congress finds it difficult to agree on much of anything
regarding immigration.
B) improve employment prospects for native-born Americans.
C) have little effect on medical markets, as so few physicians practicing medicine in the United
States are foreigners.
D) raise the costs of operating in many of the nation's rural and inner-city hospitals.
E) allow more Americans trained abroad to compete for openings in United States' residency
programs.
Correct Answer: D) raise the costs of operating in many of the nation's rural and inner-city
hospitals.
Rationale: The U.S. healthcare system relies heavily on International Medical Graduates
(IMGs), particularly in underserved areas. Rural and inner-city hospitals often struggle to
attract U.S.-born physicians and frequently utilize J-1 visa waivers to staff their facilities.
Restricting legal immigration would decrease the supply of these physicians, forcing these
hospitals to increase wages significantly to attract domestic talent or potentially face service
closures, thereby increasing the overall cost of operations.
Question 3
Physicians who own their own diagnostic testing facilities tend to order more tests, charge higher
fees for them, and have higher total bills to patients. This practice of self-referral is an example
, 2
of:
A) cognitive dissonance.
B) physician-induced demand.
C) moral hazard.
D) adverse selection.
E) res ipsa loquitur.
Correct Answer: B) physician-induced demand.
Rationale: Physician-induced demand (PID) occurs when a physician uses their
informational advantage over the patient to suggest more care than the patient would have
chosen if the patient had the same information as the physician. When a physician has a
financial interest in the facility (self-referral), the incentive to maximize income aligns with
ordering additional tests, shifting the patient's demand curve to the right.
Question 4
Which of the following statements is true concerning the trend in community hospital care
between inpatient and outpatient services since the mid-1980s?
A) Both inpatient and outpatient services have been declining.
B) There has been no noticeable trend in either inpatient or outpatient services.
C) Both inpatient and outpatient services have been growing.
D) Outpatient services have been growing, while inpatient services have been declining.
E) Outpatient services have been declining, while inpatient services have been growing.
Correct Answer: D) Outpatient services have been growing, while inpatient services have
been declining.
Rationale: Since the mid-1980s, the introduction of the Prospective Payment System (PPS)
and Diagnosis-Related Groups (DRGs) created strong incentives for hospitals to reduce
lengths of stay. Coupled with technological advancements in minimally invasive surgery
and anesthesia, many procedures that previously required overnight stays shifted to the
outpatient setting. This resulted in a steady decline in inpatient "bed days" and a
simultaneous boom in hospital-based and freestanding outpatient clinics.
Question 5
The amount that Medicare pays a hospital for treating a Medicare patient is determined:
A) at the point when the diagnosis is made.
B) at the time of admission to the hospital.
C) before the patient sees a physician.
D) after the hospital bill is reviewed by Medicare auditors.
E) after medical services are provided.
Correct Answer: A) at the point when the diagnosis is made.
Rationale: Medicare uses the Prospective Payment System, where payment is based on
, 3
Diagnosis-Related Groups (DRGs). This means the reimbursement amount is fixed based
on the patient's clinical diagnosis and expected resource consumption, rather than the
actual costs or charges incurred during the stay. Once the diagnosis is established and
coded, the hospital knows the amount it will receive, incentivizing efficiency.
Question 6
Compared to the not-for-profit organizational form, the for-profit environment:
A) allows for the transfer of assets.
B) lacks a profit motive.
C) gives shareholders higher returns on their investment.
D) provides patients with higher quality of care.
E) does not provide charity care.
Correct Answer: A) allows for the transfer of assets.
Rationale: The defining legal difference between for-profit and not-for-profit entities is the
"non-distribution constraint." Not-for-profits cannot distribute "profits" to individuals or
shareholders; any surplus must be reinvested in the mission. For-profits, however, have
equity holders and the legal ability to transfer assets, sell ownership, and distribute
dividends, which provides greater access to capital markets.
Question 7
What is the most significant cost of attending medical school?
A) Books and incidentals
B) Room and board
C) Tuition and fees
D) The income foregone
E) Student loan interest
Correct Answer: D) The income foregone
Rationale: In economic terms, "opportunity cost" is the value of the next best alternative.
For medical students, while tuition is high, the "income foregone" (the salary they could
have earned working a full-time job during the four years of medical school and
subsequent low-paid residency years) typically exceeds the direct out-of-pocket costs of
tuition and fees.
Question 8
Using the physician-control model to explain hospital behavior leads to which of the following
conclusions?
A) Other medical inputs tend to be overused to maximize physicians' productivity.
B) All investment decisions will be based on optimal resource use.
C) The use of operating rooms will be maximized with little excess capacity.
, 4
D) Physicians will strive to use the nursing staff efficiently.
E) The hospital will prioritize cost-minimization above all else.
Correct Answer: A) Other medical inputs tend to be overused to maximize physicians'
productivity.
Rationale: The physician-control model assumes that the hospital is run for the benefit of
the medical staff. To maximize the physician's own productivity and income, they will
demand that the hospital provide an abundance of complementary inputs—such as nursing
staff, residents, and the latest technology—at no cost to the physician, even if those inputs
are not used efficiently by the hospital itself.
Question 9
Economies of scale exist when:
A) long-run average costs decline as output increases.
B) long-run average costs increase as output increases.
C) long-run average costs are constant.
D) short-run average costs decline.
E) short-run average costs increase.
Correct Answer: A) long-run average costs decline as output increases.
Rationale: Economies of scale occur when the Long-Run Average Cost (LRAC) curve is
downward sloping. This means that as a hospital or clinic increases its volume of services
(output), the cost per unit of service decreases. This is often due to the ability to spread
fixed costs (like expensive MRI machines or administrative overhead) over a larger number
of patients.
Question 10
Which of the following statements about the distribution of physicians among specialties is true
in the United States?
A) There are twice as many generalists as there are specialists.
B) The majority of physicians specialize in general/family practice.
C) There are twice as many specialists as there are generalists.
D) The specialty distribution in the United States is similar to that of the rest of the world.
E) Specialist numbers are declining relative to primary care.
Correct Answer: C) There are twice as many specialists as there are generalists.
Rationale: In the U.S., roughly one-third of physicians are in primary care (generalists),
while two-thirds are specialists. This is a higher ratio of specialists than in many other
developed nations (like the UK or Canada), where the split is often closer to 50/50. This is
driven by higher reimbursement rates for procedures and the prestige associated with
specialty medicine.
