MHA710 | MHA710 Healthcare Economics Exam 4
v2 | Questions with Correct Answers and Expert
Explanation for Each Question | Louisiana State
University in Shreveport
1. Which of the following is a primary characteristic of a Health Maintenance Organization
(HMO)?
A. High premiums with unlimited provider choice
B. Lack of any utilization review process
C. Focus solely on tertiary care services
D. A requirement to use a primary care physician as a gatekeeper
Correct Answer: D
Expert Explanation: HMOs emphasize coordinated care by requiring members to select a
primary care physician. This physician acts as a gatekeeper who must provide referrals for
specialist visits. This structure is designed to control costs by managing utilization and
ensuring care is provided in the most appropriate setting.
2. In the pharmaceutical industry, what is the primary purpose of a patent?
A. To ensure that all drugs are sold at the same price
B. To eliminate the need for FDA approval
C. To mandate that the drug be effective for all patients
D. To provide a period of monopoly power to recoup R&D costs
Correct Answer: D
Expert Explanation: Patents grant pharmaceutical companies exclusive rights to produce
and sell a drug for a specific period. This protection allows firms to recover the massive
investment required for research and development. Without patents, competitors could
enter the market immediately with generics, reducing the incentive for innovation.
3. What does ‘Medicare Part D’ specifically cover?
A. Prescription drug coverage
B. Physician services and outpatient care
C. Inpatient hospital stays
D. Nursing home custodial care
Correct Answer: A
,Expert Explanation: Medicare Part D was established by the Medicare Modernization Act
of 2003 to help beneficiaries pay for prescription drugs. It is provided through private
insurance plans that are approved by Medicare. This part of the program is voluntary and
requires the payment of a monthly premium.
4. Which economic concept explains why individuals with higher health risks are more likely
to purchase insurance?
A. Adverse Selection
B. Economies of Scale
C. Moral Hazard
D. Diminishing Marginal Utility
Correct Answer: A
Expert Explanation: Adverse selection occurs when there is asymmetric information
between the buyer and the insurer. High-risk individuals possess more information about
their health status than the insurance company. If insurers cannot distinguish between
high and low risks, the resulting pool may become predominantly high-risk, leading to
higher premiums.
5. Which of the following describes a ‘Preferred Provider Organization’ (PPO)?
A. A plan where out-of-network care is never covered
B. A restrictive model where only one hospital is available
C. A network of providers that offers services at discounted rates
D. A government-run insurance program for the elderly
Correct Answer: C
Expert Explanation: PPOs create a network of preferred providers who agree to provide
services at a pre-negotiated, lower rate. Unlike HMOs, PPOs generally allow members to
see out-of-network providers, though at a higher out-of-pocket cost. This model provides
more flexibility to the consumer while still aiming for cost containment.
6. What is the ‘Doughnut Hole’ in the context of Medicare Part D?
A. A period where the government pays for all medications
B. A coverage gap where beneficiaries pay a higher percentage of drug costs
C. The initial deductible that must be met annually
D. A tax penalty for not enrolling in Medicare
Correct Answer: B
, Expert Explanation: The ‘Doughnut Hole’ refers to a temporary limit on what the drug
plan will cover for drugs. Once a beneficiary reaches a certain spending limit, they enter
this gap and must pay a larger share of their drug costs. The Affordable Care Act included
provisions to gradually close this gap by reducing the percentage beneficiaries pay.
7. Why do pharmaceutical companies often engage in ‘price discrimination’ across different
countries?
A. To comply with international laws requiring uniform pricing
B. Because production costs differ wildly between countries
C. To maximize profits based on varying price elasticities of demand
D. To avoid shipping costs
Correct Answer: C
Expert Explanation: Price discrimination allows firms to charge different prices in
different markets based on the consumers’ willingness and ability to pay. Countries with
higher income levels or less government regulation often face higher prices. By doing this,
firms can extract more consumer surplus and maximize their overall revenue.
8. Which of the following is an example of ‘Moral Hazard’ in health insurance?
A. A person consuming more healthcare because the insurance pays for it
B. An individual hiding a pre-existing condition from an insurer
C. An insurance company refusing to cover a specific demographic
D. A doctor moving their practice to a high-income area
Correct Answer: A
Expert Explanation: Moral hazard refers to the change in behavior that occurs when an
individual is insulated from the full cost of a service. In healthcare, having insurance
reduces the out-of-pocket price, leading patients to utilize more services than they would
otherwise. This increase in utilization can lead to higher overall healthcare spending and
premiums.
9. What is the primary goal of ‘Cost-Effectiveness Analysis’ (CEA) in healthcare?
A. To find the cheapest possible treatment regardless of quality
B. To eliminate all private insurance companies
C. To ensure that all medical staff are paid the same wage
D. To compare the relative costs and outcomes of different interventions
Correct Answer: D
v2 | Questions with Correct Answers and Expert
Explanation for Each Question | Louisiana State
University in Shreveport
1. Which of the following is a primary characteristic of a Health Maintenance Organization
(HMO)?
A. High premiums with unlimited provider choice
B. Lack of any utilization review process
C. Focus solely on tertiary care services
D. A requirement to use a primary care physician as a gatekeeper
Correct Answer: D
Expert Explanation: HMOs emphasize coordinated care by requiring members to select a
primary care physician. This physician acts as a gatekeeper who must provide referrals for
specialist visits. This structure is designed to control costs by managing utilization and
ensuring care is provided in the most appropriate setting.
2. In the pharmaceutical industry, what is the primary purpose of a patent?
A. To ensure that all drugs are sold at the same price
B. To eliminate the need for FDA approval
C. To mandate that the drug be effective for all patients
D. To provide a period of monopoly power to recoup R&D costs
Correct Answer: D
Expert Explanation: Patents grant pharmaceutical companies exclusive rights to produce
and sell a drug for a specific period. This protection allows firms to recover the massive
investment required for research and development. Without patents, competitors could
enter the market immediately with generics, reducing the incentive for innovation.
3. What does ‘Medicare Part D’ specifically cover?
A. Prescription drug coverage
B. Physician services and outpatient care
C. Inpatient hospital stays
D. Nursing home custodial care
Correct Answer: A
,Expert Explanation: Medicare Part D was established by the Medicare Modernization Act
of 2003 to help beneficiaries pay for prescription drugs. It is provided through private
insurance plans that are approved by Medicare. This part of the program is voluntary and
requires the payment of a monthly premium.
4. Which economic concept explains why individuals with higher health risks are more likely
to purchase insurance?
A. Adverse Selection
B. Economies of Scale
C. Moral Hazard
D. Diminishing Marginal Utility
Correct Answer: A
Expert Explanation: Adverse selection occurs when there is asymmetric information
between the buyer and the insurer. High-risk individuals possess more information about
their health status than the insurance company. If insurers cannot distinguish between
high and low risks, the resulting pool may become predominantly high-risk, leading to
higher premiums.
5. Which of the following describes a ‘Preferred Provider Organization’ (PPO)?
A. A plan where out-of-network care is never covered
B. A restrictive model where only one hospital is available
C. A network of providers that offers services at discounted rates
D. A government-run insurance program for the elderly
Correct Answer: C
Expert Explanation: PPOs create a network of preferred providers who agree to provide
services at a pre-negotiated, lower rate. Unlike HMOs, PPOs generally allow members to
see out-of-network providers, though at a higher out-of-pocket cost. This model provides
more flexibility to the consumer while still aiming for cost containment.
6. What is the ‘Doughnut Hole’ in the context of Medicare Part D?
A. A period where the government pays for all medications
B. A coverage gap where beneficiaries pay a higher percentage of drug costs
C. The initial deductible that must be met annually
D. A tax penalty for not enrolling in Medicare
Correct Answer: B
, Expert Explanation: The ‘Doughnut Hole’ refers to a temporary limit on what the drug
plan will cover for drugs. Once a beneficiary reaches a certain spending limit, they enter
this gap and must pay a larger share of their drug costs. The Affordable Care Act included
provisions to gradually close this gap by reducing the percentage beneficiaries pay.
7. Why do pharmaceutical companies often engage in ‘price discrimination’ across different
countries?
A. To comply with international laws requiring uniform pricing
B. Because production costs differ wildly between countries
C. To maximize profits based on varying price elasticities of demand
D. To avoid shipping costs
Correct Answer: C
Expert Explanation: Price discrimination allows firms to charge different prices in
different markets based on the consumers’ willingness and ability to pay. Countries with
higher income levels or less government regulation often face higher prices. By doing this,
firms can extract more consumer surplus and maximize their overall revenue.
8. Which of the following is an example of ‘Moral Hazard’ in health insurance?
A. A person consuming more healthcare because the insurance pays for it
B. An individual hiding a pre-existing condition from an insurer
C. An insurance company refusing to cover a specific demographic
D. A doctor moving their practice to a high-income area
Correct Answer: A
Expert Explanation: Moral hazard refers to the change in behavior that occurs when an
individual is insulated from the full cost of a service. In healthcare, having insurance
reduces the out-of-pocket price, leading patients to utilize more services than they would
otherwise. This increase in utilization can lead to higher overall healthcare spending and
premiums.
9. What is the primary goal of ‘Cost-Effectiveness Analysis’ (CEA) in healthcare?
A. To find the cheapest possible treatment regardless of quality
B. To eliminate all private insurance companies
C. To ensure that all medical staff are paid the same wage
D. To compare the relative costs and outcomes of different interventions
Correct Answer: D
