MHA710 | MHA710 Healthcare Economics Exam 2
v3 | Questions with Correct Answers and Expert
Explanation for Each Question | Louisiana State
University in Shreveport
1. What is the primary characteristic of ‘moral hazard’ in the context of health insurance?
A. Individuals with higher health risks are more likely to buy insurance.
B. Physicians provide fewer services to maximize their own leisure time.
C. Insurers charge higher premiums to healthy individuals to cover the sick.
D. Insured individuals may consume more healthcare because their out-of-pocket costs are
lower.
Correct Answer: D
Expert Explanation: Moral hazard occurs when the presence of insurance alters the
behavior of the insured party, typically leading to increased consumption. Because the
price at the point of service is subsidized, patients tend to utilize more services than they
would 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 Grossman model of health demand, health is viewed as both a consumption good
and a:
A. Public good
B. Normal good
C. Giffen good
D. Investment good
Correct Answer: D
Expert Explanation: The Grossman model treats health as a capital stock that yields
‘healthy time’ for both work and leisure. As an investment good, individuals invest in health
to increase the total number of days available for productive activity. This distinction helps
explain why demand for health services might increase with age as the health stock
depreciates faster.
3. Which of the following describes ‘Adverse Selection’ in health insurance markets?
A. Sicker people are more likely to purchase health insurance than healthy people.
B. Insurance companies only select the healthiest individuals to insure.
C. Patients follow medical advice only when it is convenient.
,D. Hospitals choose only the most profitable patients for admission.
Correct Answer: A
Expert Explanation: Adverse selection occurs when information asymmetry allows those
with higher-than-average risk to enroll in insurance plans disproportionately. If insurers
cannot distinguish between high-risk and low-risk individuals, they set premiums based on
average risk, which may cause low-risk individuals to drop out. This cycle can lead to a
‘death spiral’ where only the most expensive patients remain in the pool.
4. The ‘Medical Arms Race’ hypothesis suggests that hospital competition leads to:
A. Lower prices for all medical procedures.
B. Increased costs due to the adoption of expensive technologies to attract physicians and
patients.
C. Reduced quality of care due to cost-cutting.
D. More efficient use of administrative staff.
Correct Answer: B
Expert Explanation: The Medical Arms Race theory posits that hospitals compete for
doctors and patients by offering the most advanced technology and amenities. Unlike
typical markets where competition drives prices down, this specific type of competition
can drive healthcare costs up. This occurs because insurers often cover these higher costs,
insulating the consumer from the price of the redundant technology.
5. Under a ‘Capitation’ payment system, a provider is paid:
A. A fixed amount for every service performed.
B. A fixed amount per enrollee per period, regardless of the number of services provided.
C. Based on the complexity and duration of the patient visit.
D. A salary determined by the government.
Correct Answer: B
Expert Explanation: Capitation shifts the financial risk from the insurer to the provider by
paying a flat fee per patient. This incentivizes providers to focus on preventive care and
efficiency rather than volume of services. However, it also creates an incentive to ‘stint’ on
care or avoid high-risk patients who might exceed the capitated payment.
6. What did the RAND Health Insurance Experiment conclude about the impact of cost-
sharing?
A. Higher cost-sharing significantly reduces utilization but usually does not harm health
outcomes for the general population.
B. Higher cost-sharing has no effect on the utilization of services.
, C. Cost-sharing increases the use of preventive services.
D. Full insurance coverage leads to worse health outcomes than cost-sharing.
Correct Answer: A
Expert Explanation: The RAND experiment is a landmark study that showed patients are
price-sensitive regarding healthcare utilization. It found that as out-of-pocket costs rose,
patients consumed less care across the board, including both necessary and unnecessary
services. Interestingly, for most people, this reduction in care did not lead to significantly
worse health outcomes, except for the very poor and sick.
7. Physician-Induced Demand (PID) is most likely to occur when:
A. Physicians utilize their information advantage to recommend more services than are
medically necessary to increase income.
B. Patients have perfect information about their health conditions.
C. There is a shortage of doctors in a rural area.
D. Medicare reduces the reimbursement rates for all primary care services.
Correct Answer: A
Expert Explanation: Physician-Induced Demand suggests that because doctors act as both
advisors and providers, they can influence the patient’s demand curve. This typically
happens when physician income is threatened, leading them to recommend more tests or
procedures. The theory relies on the concept of asymmetric information, where the patient
trusts the doctor’s expert opinion without knowing if the service is truly required.
8. Which of the following is an example of an ‘Experience Rating’ in insurance premiums?
A. Charging the same premium to everyone in a specific geographic area.
B. Adjusting premiums based solely on age and gender as permitted by law.
C. Mandating that all employees of a firm pay 10% of their salary for health coverage.
D. Setting premiums based on the historical medical costs of a specific group or individual.
Correct Answer: D
Expert Explanation: Experience rating involves calculating premiums based on the prior
health expenditures of the insured group. This approach allows insurers to align premiums
more closely with expected costs, reducing the risk of losses from high-utilizing groups. In
contrast, community rating ignores individual history and charges everyone in a pool the
same rate.
9. In economic terms, ‘Deadweight Loss’ from health insurance is caused by:
A. The administrative costs of processing claims.
B. The profits earned by pharmaceutical companies.
v3 | Questions with Correct Answers and Expert
Explanation for Each Question | Louisiana State
University in Shreveport
1. What is the primary characteristic of ‘moral hazard’ in the context of health insurance?
A. Individuals with higher health risks are more likely to buy insurance.
B. Physicians provide fewer services to maximize their own leisure time.
C. Insurers charge higher premiums to healthy individuals to cover the sick.
D. Insured individuals may consume more healthcare because their out-of-pocket costs are
lower.
Correct Answer: D
Expert Explanation: Moral hazard occurs when the presence of insurance alters the
behavior of the insured party, typically leading to increased consumption. Because the
price at the point of service is subsidized, patients tend to utilize more services than they
would 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 Grossman model of health demand, health is viewed as both a consumption good
and a:
A. Public good
B. Normal good
C. Giffen good
D. Investment good
Correct Answer: D
Expert Explanation: The Grossman model treats health as a capital stock that yields
‘healthy time’ for both work and leisure. As an investment good, individuals invest in health
to increase the total number of days available for productive activity. This distinction helps
explain why demand for health services might increase with age as the health stock
depreciates faster.
3. Which of the following describes ‘Adverse Selection’ in health insurance markets?
A. Sicker people are more likely to purchase health insurance than healthy people.
B. Insurance companies only select the healthiest individuals to insure.
C. Patients follow medical advice only when it is convenient.
,D. Hospitals choose only the most profitable patients for admission.
Correct Answer: A
Expert Explanation: Adverse selection occurs when information asymmetry allows those
with higher-than-average risk to enroll in insurance plans disproportionately. If insurers
cannot distinguish between high-risk and low-risk individuals, they set premiums based on
average risk, which may cause low-risk individuals to drop out. This cycle can lead to a
‘death spiral’ where only the most expensive patients remain in the pool.
4. The ‘Medical Arms Race’ hypothesis suggests that hospital competition leads to:
A. Lower prices for all medical procedures.
B. Increased costs due to the adoption of expensive technologies to attract physicians and
patients.
C. Reduced quality of care due to cost-cutting.
D. More efficient use of administrative staff.
Correct Answer: B
Expert Explanation: The Medical Arms Race theory posits that hospitals compete for
doctors and patients by offering the most advanced technology and amenities. Unlike
typical markets where competition drives prices down, this specific type of competition
can drive healthcare costs up. This occurs because insurers often cover these higher costs,
insulating the consumer from the price of the redundant technology.
5. Under a ‘Capitation’ payment system, a provider is paid:
A. A fixed amount for every service performed.
B. A fixed amount per enrollee per period, regardless of the number of services provided.
C. Based on the complexity and duration of the patient visit.
D. A salary determined by the government.
Correct Answer: B
Expert Explanation: Capitation shifts the financial risk from the insurer to the provider by
paying a flat fee per patient. This incentivizes providers to focus on preventive care and
efficiency rather than volume of services. However, it also creates an incentive to ‘stint’ on
care or avoid high-risk patients who might exceed the capitated payment.
6. What did the RAND Health Insurance Experiment conclude about the impact of cost-
sharing?
A. Higher cost-sharing significantly reduces utilization but usually does not harm health
outcomes for the general population.
B. Higher cost-sharing has no effect on the utilization of services.
, C. Cost-sharing increases the use of preventive services.
D. Full insurance coverage leads to worse health outcomes than cost-sharing.
Correct Answer: A
Expert Explanation: The RAND experiment is a landmark study that showed patients are
price-sensitive regarding healthcare utilization. It found that as out-of-pocket costs rose,
patients consumed less care across the board, including both necessary and unnecessary
services. Interestingly, for most people, this reduction in care did not lead to significantly
worse health outcomes, except for the very poor and sick.
7. Physician-Induced Demand (PID) is most likely to occur when:
A. Physicians utilize their information advantage to recommend more services than are
medically necessary to increase income.
B. Patients have perfect information about their health conditions.
C. There is a shortage of doctors in a rural area.
D. Medicare reduces the reimbursement rates for all primary care services.
Correct Answer: A
Expert Explanation: Physician-Induced Demand suggests that because doctors act as both
advisors and providers, they can influence the patient’s demand curve. This typically
happens when physician income is threatened, leading them to recommend more tests or
procedures. The theory relies on the concept of asymmetric information, where the patient
trusts the doctor’s expert opinion without knowing if the service is truly required.
8. Which of the following is an example of an ‘Experience Rating’ in insurance premiums?
A. Charging the same premium to everyone in a specific geographic area.
B. Adjusting premiums based solely on age and gender as permitted by law.
C. Mandating that all employees of a firm pay 10% of their salary for health coverage.
D. Setting premiums based on the historical medical costs of a specific group or individual.
Correct Answer: D
Expert Explanation: Experience rating involves calculating premiums based on the prior
health expenditures of the insured group. This approach allows insurers to align premiums
more closely with expected costs, reducing the risk of losses from high-utilizing groups. In
contrast, community rating ignores individual history and charges everyone in a pool the
same rate.
9. In economic terms, ‘Deadweight Loss’ from health insurance is caused by:
A. The administrative costs of processing claims.
B. The profits earned by pharmaceutical companies.
