MHA710 | MHA710 Healthcare Economics Exam 4
v1 | Questions with Correct Answers and Expert
Explanation for Each Question | Louisiana State
University in Shreveport
1. Which of the following best describes the concept of Moral Hazard in healthcare?
A. The tendency for insurance companies to seek out healthy individuals.
B. A change in consumer behavior where they utilize more services because they are
insulated from the full cost.
C. The situation where patients have more information about their health than insurers.
D. The failure of the market to provide services to those without insurance.
Correct Answer: B
Expert Explanation: Moral hazard refers to the behavioral change that occurs when an
individual is covered by insurance. Because the out-of-pocket cost is reduced, the insured
person is more likely to consume additional medical services than if they paid the full price.
This concept is a central challenge in designing insurance plans that balance access with
cost control.
2. In the context of the ‘Lemons’ problem in healthcare, what does Adverse Selection
typically lead to?
A. A market dominated by low-risk individuals.
B. Lower premiums for all participants.
C. A pool of insured individuals that is riskier than the average population.
D. Increased competition among insurance providers.
Correct Answer: C
Expert Explanation: Adverse selection occurs when individuals with higher health risks
are more likely to purchase insurance than healthy individuals. This happens because those
with known health issues perceive a greater value in insurance coverage. Over time, this
can lead to a ‘death spiral’ where premiums rise and healthy people drop out of the plan.
3. Which payment model shifts the most financial risk from the payer to the provider?
A. Fee-for-service
B. Pay-for-performance
C. Capitation
,D. Discounted fee-for-service
Correct Answer: C
Expert Explanation: Capitation involves paying a provider a fixed amount per patient per
unit of time, regardless of the actual services provided. This means the provider assumes
the risk that the cost of care will exceed the fixed payment. In contrast, fee-for-service
keeps the risk with the payer, as they pay for every unit of service rendered.
4. How is the Incremental Cost-Effectiveness Ratio (ICER) calculated?
A. Total Cost divided by Total Quality Adjusted Life Years.
B. The sum of all benefits minus the sum of all costs.
C. The difference in costs divided by the difference in health outcomes between two
interventions.
D. The ratio of physician fees to patient outcomes.
Correct Answer: C
Expert Explanation: The ICER is a standard tool in health economics used to compare the
relative costs and outcomes of different medical treatments. It is calculated by taking the
change in costs and dividing it by the change in effectiveness, often measured in QALYs.
This allows policymakers to determine if a new treatment provides enough additional
benefit to justify its extra cost.
5. What is the primary purpose of a Quality-Adjusted Life Year (QALY)?
A. To combine both the quantity and the quality of life into a single metric for economic
evaluation.
B. To measure the efficiency of hospital administrative staff.
C. To calculate the exact monetary value of a human life.
D. To determine the legal liability of a physician in malpractice cases.
Correct Answer: A
Expert Explanation: A QALY is a multidimensional measure used to evaluate the clinical
benefit of a health intervention. It assigns a weight to time spent in different health states,
where 1 represents perfect health and 0 represents death. This measurement enables
researchers to compare treatments for different diseases using a common denominator.
6. Which market structure is characterized by a single provider of a specific healthcare service
in a geographic area?
A. Monopoly
B. Oligopoly
C. Perfect Competition
, D. Monopolistic Competition
Correct Answer: A
Expert Explanation: A monopoly exists when one firm is the sole supplier of a service,
often leading to higher prices and reduced output. In healthcare, this can occur with
specialized hospitals in rural areas or patented pharmaceutical drugs. Regulators often
monitor these structures to prevent the abuse of market power.
7. Under the Grossman Model of health demand, how is health viewed?
A. Strictly as a consumption good with no long-term value.
B. As a public good provided solely by the government.
C. As a random variable that cannot be influenced by individual choice.
D. As a capital stock that yields utility and depreciates over time.
Correct Answer: D
Expert Explanation: Michael Grossman’s model treats health as a durable capital stock
that individuals inherit and can invest in through medical care and lifestyle choices. Health
depreciates as a person ages, and individuals must decide how much to invest to maintain
their health levels. This model explains why demand for healthcare often increases with
age despite higher rates of depreciation.
8. Supplier-Induced Demand (SID) suggests that:
A. Physicians can influence the demand for their own services due to asymmetric
information.
B. Patients always demand more care than they need.
C. Insurance companies force providers to offer unnecessary treatments.
D. The government determines the quantity of care provided in the market.
Correct Answer: A
Expert Explanation: Supplier-induced demand occurs because physicians act as both the
expert advisor and the provider of services. Due to the information gap between the doctor
and the patient, the doctor may recommend more services than the patient would have
chosen if they had the same knowledge. This is often cited as a reason for rising healthcare
expenditures.
9. Which of the following is a characteristic of ‘Experience Rating’ in health insurance?
A. Premiums are adjusted based on the prior health claims and risk profile of a specific
group.
B. All individuals in a group pay the same premium regardless of health history.
C. Premiums are based on the average risk of a large geographic community.
v1 | Questions with Correct Answers and Expert
Explanation for Each Question | Louisiana State
University in Shreveport
1. Which of the following best describes the concept of Moral Hazard in healthcare?
A. The tendency for insurance companies to seek out healthy individuals.
B. A change in consumer behavior where they utilize more services because they are
insulated from the full cost.
C. The situation where patients have more information about their health than insurers.
D. The failure of the market to provide services to those without insurance.
Correct Answer: B
Expert Explanation: Moral hazard refers to the behavioral change that occurs when an
individual is covered by insurance. Because the out-of-pocket cost is reduced, the insured
person is more likely to consume additional medical services than if they paid the full price.
This concept is a central challenge in designing insurance plans that balance access with
cost control.
2. In the context of the ‘Lemons’ problem in healthcare, what does Adverse Selection
typically lead to?
A. A market dominated by low-risk individuals.
B. Lower premiums for all participants.
C. A pool of insured individuals that is riskier than the average population.
D. Increased competition among insurance providers.
Correct Answer: C
Expert Explanation: Adverse selection occurs when individuals with higher health risks
are more likely to purchase insurance than healthy individuals. This happens because those
with known health issues perceive a greater value in insurance coverage. Over time, this
can lead to a ‘death spiral’ where premiums rise and healthy people drop out of the plan.
3. Which payment model shifts the most financial risk from the payer to the provider?
A. Fee-for-service
B. Pay-for-performance
C. Capitation
,D. Discounted fee-for-service
Correct Answer: C
Expert Explanation: Capitation involves paying a provider a fixed amount per patient per
unit of time, regardless of the actual services provided. This means the provider assumes
the risk that the cost of care will exceed the fixed payment. In contrast, fee-for-service
keeps the risk with the payer, as they pay for every unit of service rendered.
4. How is the Incremental Cost-Effectiveness Ratio (ICER) calculated?
A. Total Cost divided by Total Quality Adjusted Life Years.
B. The sum of all benefits minus the sum of all costs.
C. The difference in costs divided by the difference in health outcomes between two
interventions.
D. The ratio of physician fees to patient outcomes.
Correct Answer: C
Expert Explanation: The ICER is a standard tool in health economics used to compare the
relative costs and outcomes of different medical treatments. It is calculated by taking the
change in costs and dividing it by the change in effectiveness, often measured in QALYs.
This allows policymakers to determine if a new treatment provides enough additional
benefit to justify its extra cost.
5. What is the primary purpose of a Quality-Adjusted Life Year (QALY)?
A. To combine both the quantity and the quality of life into a single metric for economic
evaluation.
B. To measure the efficiency of hospital administrative staff.
C. To calculate the exact monetary value of a human life.
D. To determine the legal liability of a physician in malpractice cases.
Correct Answer: A
Expert Explanation: A QALY is a multidimensional measure used to evaluate the clinical
benefit of a health intervention. It assigns a weight to time spent in different health states,
where 1 represents perfect health and 0 represents death. This measurement enables
researchers to compare treatments for different diseases using a common denominator.
6. Which market structure is characterized by a single provider of a specific healthcare service
in a geographic area?
A. Monopoly
B. Oligopoly
C. Perfect Competition
, D. Monopolistic Competition
Correct Answer: A
Expert Explanation: A monopoly exists when one firm is the sole supplier of a service,
often leading to higher prices and reduced output. In healthcare, this can occur with
specialized hospitals in rural areas or patented pharmaceutical drugs. Regulators often
monitor these structures to prevent the abuse of market power.
7. Under the Grossman Model of health demand, how is health viewed?
A. Strictly as a consumption good with no long-term value.
B. As a public good provided solely by the government.
C. As a random variable that cannot be influenced by individual choice.
D. As a capital stock that yields utility and depreciates over time.
Correct Answer: D
Expert Explanation: Michael Grossman’s model treats health as a durable capital stock
that individuals inherit and can invest in through medical care and lifestyle choices. Health
depreciates as a person ages, and individuals must decide how much to invest to maintain
their health levels. This model explains why demand for healthcare often increases with
age despite higher rates of depreciation.
8. Supplier-Induced Demand (SID) suggests that:
A. Physicians can influence the demand for their own services due to asymmetric
information.
B. Patients always demand more care than they need.
C. Insurance companies force providers to offer unnecessary treatments.
D. The government determines the quantity of care provided in the market.
Correct Answer: A
Expert Explanation: Supplier-induced demand occurs because physicians act as both the
expert advisor and the provider of services. Due to the information gap between the doctor
and the patient, the doctor may recommend more services than the patient would have
chosen if they had the same knowledge. This is often cited as a reason for rising healthcare
expenditures.
9. Which of the following is a characteristic of ‘Experience Rating’ in health insurance?
A. Premiums are adjusted based on the prior health claims and risk profile of a specific
group.
B. All individuals in a group pay the same premium regardless of health history.
C. Premiums are based on the average risk of a large geographic community.
