MHA710 | MHA710 Healthcare Economics Exam 3
v1 Questions with Correct Answers and Expert
Explanation for Each Question
1. Which economic concept explains why a physician might recommend more tests
than medically necessary because they have more information than the patient?
A. Moral hazard
B. Supplier-induced demand
C. Adverse selection
D. Consumer sovereignty
Correct Answer: B
Expert Explanation: Supplier-induced demand occurs when a provider influences a
patient’s demand for care to align with the provider’s interests. This behavior is
possible due to the information asymmetry inherent in the patient-provider
relationship. Economists study this to understand how payment incentives affect
the volume of medical services provided.
2. In the context of hospital competition, what does the ‘Medical Arms Race’
hypothesis suggest?
A. Hospitals compete primarily on price to attract low-income patients.
B. Hospitals consolidate to form monopolies and reduce service quality.
,C. Hospitals compete by acquiring the latest medical technology to attract
physicians and patients.
D. Insurance companies dictate which medical equipment a hospital can purchase.
Correct Answer: C
Expert Explanation: The Medical Arms Race hypothesis posits that hospitals
compete for patients and doctors by offering high-tech medical services and
equipment. This type of non-price competition was particularly prevalent before the
shift toward prospective payment systems. Such competition often leads to
increased healthcare costs without a proportional increase in population health
outcomes.
3. Which health system model is characterized by universal coverage, government-
owned providers, and financing through general tax revenue?
A. Beveridge Model
B. National Health Insurance Model
C. Bismarck Model
D. Out-of-Pocket Model
Correct Answer: A
,Expert Explanation: The Beveridge Model, named after William Beveridge, is used
in countries like the United Kingdom. In this system, the government acts as the
single payer and many hospitals and clinics are government-owned. This model
aims to provide healthcare as a public service rather than a market-based
commodity.
4. What is the primary purpose of a Certificate of Need (CON) law?
A. To ensure that all physicians are board-certified in their specialty.
B. To regulate the expansion of healthcare facilities to prevent unnecessary
duplication of services.
C. To provide patients with certificates that allow them to seek care out of state.
D. To mandate that hospitals provide a certain level of charity care.
Correct Answer: B
Expert Explanation: Certificate of Need laws are state-level regulations that
require healthcare providers to get approval before expanding or building new
facilities. The intent is to control healthcare costs by preventing the overbuilding of
hospital capacity. Proponents argue it ensures stability, while critics suggest it
protects incumbents and limits competition.
, 5. In pharmaceutical economics, what is the ‘Type II error’ regarding FDA drug
approval?
A. Approving a drug that turns out to be unsafe or ineffective.
B. Granting a patent to a drug that is not truly innovative.
C. Charging a price that is higher than the marginal cost of production.
D. Failing to approve a drug that is actually safe and effective.
Correct Answer: D
Expert Explanation: A Type II error in the regulatory context occurs when a
beneficial drug is delayed or kept off the market. This represents a lost opportunity
for patient health improvements and can discourage future innovation. Regulators
must balance this risk against Type I errors, which involve approving harmful
substances.
6. Which of the following describes ‘Cream Skimming’ in the insurance market?
A. Insurers seeking to enroll only the healthiest individuals to minimize costs.
B. Patients choosing the most expensive plans because they know they are ill.
C. Hospitals charging higher prices to private insurers to cover Medicare shortfalls.
D. The government providing subsidies to the lowest income brackets.
Correct Answer: A
v1 Questions with Correct Answers and Expert
Explanation for Each Question
1. Which economic concept explains why a physician might recommend more tests
than medically necessary because they have more information than the patient?
A. Moral hazard
B. Supplier-induced demand
C. Adverse selection
D. Consumer sovereignty
Correct Answer: B
Expert Explanation: Supplier-induced demand occurs when a provider influences a
patient’s demand for care to align with the provider’s interests. This behavior is
possible due to the information asymmetry inherent in the patient-provider
relationship. Economists study this to understand how payment incentives affect
the volume of medical services provided.
2. In the context of hospital competition, what does the ‘Medical Arms Race’
hypothesis suggest?
A. Hospitals compete primarily on price to attract low-income patients.
B. Hospitals consolidate to form monopolies and reduce service quality.
,C. Hospitals compete by acquiring the latest medical technology to attract
physicians and patients.
D. Insurance companies dictate which medical equipment a hospital can purchase.
Correct Answer: C
Expert Explanation: The Medical Arms Race hypothesis posits that hospitals
compete for patients and doctors by offering high-tech medical services and
equipment. This type of non-price competition was particularly prevalent before the
shift toward prospective payment systems. Such competition often leads to
increased healthcare costs without a proportional increase in population health
outcomes.
3. Which health system model is characterized by universal coverage, government-
owned providers, and financing through general tax revenue?
A. Beveridge Model
B. National Health Insurance Model
C. Bismarck Model
D. Out-of-Pocket Model
Correct Answer: A
,Expert Explanation: The Beveridge Model, named after William Beveridge, is used
in countries like the United Kingdom. In this system, the government acts as the
single payer and many hospitals and clinics are government-owned. This model
aims to provide healthcare as a public service rather than a market-based
commodity.
4. What is the primary purpose of a Certificate of Need (CON) law?
A. To ensure that all physicians are board-certified in their specialty.
B. To regulate the expansion of healthcare facilities to prevent unnecessary
duplication of services.
C. To provide patients with certificates that allow them to seek care out of state.
D. To mandate that hospitals provide a certain level of charity care.
Correct Answer: B
Expert Explanation: Certificate of Need laws are state-level regulations that
require healthcare providers to get approval before expanding or building new
facilities. The intent is to control healthcare costs by preventing the overbuilding of
hospital capacity. Proponents argue it ensures stability, while critics suggest it
protects incumbents and limits competition.
, 5. In pharmaceutical economics, what is the ‘Type II error’ regarding FDA drug
approval?
A. Approving a drug that turns out to be unsafe or ineffective.
B. Granting a patent to a drug that is not truly innovative.
C. Charging a price that is higher than the marginal cost of production.
D. Failing to approve a drug that is actually safe and effective.
Correct Answer: D
Expert Explanation: A Type II error in the regulatory context occurs when a
beneficial drug is delayed or kept off the market. This represents a lost opportunity
for patient health improvements and can discourage future innovation. Regulators
must balance this risk against Type I errors, which involve approving harmful
substances.
6. Which of the following describes ‘Cream Skimming’ in the insurance market?
A. Insurers seeking to enroll only the healthiest individuals to minimize costs.
B. Patients choosing the most expensive plans because they know they are ill.
C. Hospitals charging higher prices to private insurers to cover Medicare shortfalls.
D. The government providing subsidies to the lowest income brackets.
Correct Answer: A
