MHA710 | MHA710 Healthcare Economics Exam 3
v2 | Questions with Correct Answers and Expert
Explanation for Each Question | Louisiana State
University in Shreveport
1. Which economic concept explains why hospitals might invest in high-end technology to
attract physicians and patients even if it increases costs?
A. Perfect Competition
B. Price Discrimination
C. Economies of Scale
D. The Medical Arms Race
Correct Answer: D
Expert Explanation: The Medical Arms Race occurs when hospitals compete for patients
by appealing to physicians through the acquisition of the latest medical technologies. This
competition often leads to an oversupply of expensive equipment and higher overall
healthcare expenditures. Unlike price competition, this form of rivalry focuses on quality
and prestige rather than efficiency.
2. In the context of the pharmaceutical industry, what is the primary purpose of granting
patents?
A. To ensure all drugs are affordable for low-income patients
B. To prevent any other company from ever making a similar drug
C. To allow firms to recover R&D costs by providing temporary monopoly power
D. To eliminate the need for FDA approval processes
Correct Answer: C
Expert Explanation: Patents provide a temporary legal monopoly that allows
pharmaceutical companies to charge higher prices to recoup the massive investments
made in research and development. Without this protection, competitors could easily
replicate the drug and sell it at a lower cost, removing the incentive for innovation. This
highlights the trade-off between encouraging new drug creation and ensuring immediate
price competition.
3. What happens to the supply of physician services if the government implements a stricter
medical licensing requirement?
A. The supply curve shifts to the right
B. The supply curve remains unchanged
,C. The supply curve shifts to the left
D. Demand for services will automatically decrease
Correct Answer: C
Expert Explanation: Stricter licensing requirements act as a barrier to entry, reducing the
number of qualified practitioners in the market. As the number of providers decreases, the
supply curve shifts to the left, which typically leads to higher prices for medical services.
Proponents argue this ensures quality, while critics suggest it is a form of professional
protectionism.
4. Which of the following describes the phenomenon where patients consume more
healthcare because they are insured?
A. Adverse Selection
B. Asymmetric Information
C. Risk Aversion
D. Moral Hazard
Correct Answer: D
Expert Explanation: Moral hazard occurs when the presence of insurance lowers the out-
of-pocket cost of care, leading individuals to consume more services than they would if
they paid the full price. This behavior can lead to inefficiencies in the market as people seek
care with marginal benefits lower than the actual cost. It is a central challenge for insurers
in designing co-payments and deductibles.
5. Which payment system provides a fixed payment to providers for each patient assigned to
them, regardless of the number of services provided?
A. Fee-for-service
B. Diagnosis-Related Groups (DRGs)
C. Capitation
D. Cost-plus reimbursement
Correct Answer: C
Expert Explanation: Capitation shifts the financial risk from the payer to the provider by
paying a set amount per member per month. This system incentivizes providers to focus on
preventive care and avoid unnecessary procedures to remain profitable. However, there is
a risk that it may lead to the underutilization of necessary medical services.
6. What is ‘cost shifting’ in a hospital setting?
A. Moving costs from the emergency department to the surgery center
, B. Reducing costs by improving operational efficiency
C. Charging private payers more to compensate for lower reimbursements from public
payers
D. Transferring the cost of R&D to marketing budgets
Correct Answer: C
Expert Explanation: Cost shifting occurs when hospitals increase prices for private
insurance companies to make up for losses or low margins from Medicare, Medicaid, or
uncompensated care. This practice is a subject of debate among economists regarding its
extent and impact on private premiums. It reflects the complex multi-payer pricing
structure inherent in the U.S. healthcare system.
7. In economic terms, the relationship between a doctor and a patient is often described as a:
A. Principal-agent relationship
B. Supplier-customer rivalry
C. Monopolistic competition
D. Perfectly elastic market
Correct Answer: A
Expert Explanation: In a principal-agent relationship, the patient (principal) relies on the
doctor (agent) to make decisions because the doctor has specialized knowledge. This
creates an information asymmetry where the agent might not always act solely in the best
interest of the principal. Understanding this relationship is crucial for analyzing supplier-
induced demand and healthcare quality.
8. What is the primary goal of a Cost-Utility Analysis (CUA)?
A. To find the cheapest way to perform a surgery
B. To measure outcomes in terms of Quality-Adjusted Life Years (QALYs)
C. To maximize the revenue of a healthcare facility
D. To eliminate all risks associated with a new drug
Correct Answer: B
Expert Explanation: Cost-Utility Analysis is a specific type of economic evaluation that
compares the costs of an intervention to the health gains measured in QALYs. This allows
policymakers to compare different types of medical treatments across various diseases
using a common metric. It helps in prioritizing resource allocation to maximize the overall
health benefit for a population.
9. Which of the following is an example of an ‘externality’ in healthcare?
A. A patient paying their co-pay at the clinic
v2 | Questions with Correct Answers and Expert
Explanation for Each Question | Louisiana State
University in Shreveport
1. Which economic concept explains why hospitals might invest in high-end technology to
attract physicians and patients even if it increases costs?
A. Perfect Competition
B. Price Discrimination
C. Economies of Scale
D. The Medical Arms Race
Correct Answer: D
Expert Explanation: The Medical Arms Race occurs when hospitals compete for patients
by appealing to physicians through the acquisition of the latest medical technologies. This
competition often leads to an oversupply of expensive equipment and higher overall
healthcare expenditures. Unlike price competition, this form of rivalry focuses on quality
and prestige rather than efficiency.
2. In the context of the pharmaceutical industry, what is the primary purpose of granting
patents?
A. To ensure all drugs are affordable for low-income patients
B. To prevent any other company from ever making a similar drug
C. To allow firms to recover R&D costs by providing temporary monopoly power
D. To eliminate the need for FDA approval processes
Correct Answer: C
Expert Explanation: Patents provide a temporary legal monopoly that allows
pharmaceutical companies to charge higher prices to recoup the massive investments
made in research and development. Without this protection, competitors could easily
replicate the drug and sell it at a lower cost, removing the incentive for innovation. This
highlights the trade-off between encouraging new drug creation and ensuring immediate
price competition.
3. What happens to the supply of physician services if the government implements a stricter
medical licensing requirement?
A. The supply curve shifts to the right
B. The supply curve remains unchanged
,C. The supply curve shifts to the left
D. Demand for services will automatically decrease
Correct Answer: C
Expert Explanation: Stricter licensing requirements act as a barrier to entry, reducing the
number of qualified practitioners in the market. As the number of providers decreases, the
supply curve shifts to the left, which typically leads to higher prices for medical services.
Proponents argue this ensures quality, while critics suggest it is a form of professional
protectionism.
4. Which of the following describes the phenomenon where patients consume more
healthcare because they are insured?
A. Adverse Selection
B. Asymmetric Information
C. Risk Aversion
D. Moral Hazard
Correct Answer: D
Expert Explanation: Moral hazard occurs when the presence of insurance lowers the out-
of-pocket cost of care, leading individuals to consume more services than they would if
they paid the full price. This behavior can lead to inefficiencies in the market as people seek
care with marginal benefits lower than the actual cost. It is a central challenge for insurers
in designing co-payments and deductibles.
5. Which payment system provides a fixed payment to providers for each patient assigned to
them, regardless of the number of services provided?
A. Fee-for-service
B. Diagnosis-Related Groups (DRGs)
C. Capitation
D. Cost-plus reimbursement
Correct Answer: C
Expert Explanation: Capitation shifts the financial risk from the payer to the provider by
paying a set amount per member per month. This system incentivizes providers to focus on
preventive care and avoid unnecessary procedures to remain profitable. However, there is
a risk that it may lead to the underutilization of necessary medical services.
6. What is ‘cost shifting’ in a hospital setting?
A. Moving costs from the emergency department to the surgery center
, B. Reducing costs by improving operational efficiency
C. Charging private payers more to compensate for lower reimbursements from public
payers
D. Transferring the cost of R&D to marketing budgets
Correct Answer: C
Expert Explanation: Cost shifting occurs when hospitals increase prices for private
insurance companies to make up for losses or low margins from Medicare, Medicaid, or
uncompensated care. This practice is a subject of debate among economists regarding its
extent and impact on private premiums. It reflects the complex multi-payer pricing
structure inherent in the U.S. healthcare system.
7. In economic terms, the relationship between a doctor and a patient is often described as a:
A. Principal-agent relationship
B. Supplier-customer rivalry
C. Monopolistic competition
D. Perfectly elastic market
Correct Answer: A
Expert Explanation: In a principal-agent relationship, the patient (principal) relies on the
doctor (agent) to make decisions because the doctor has specialized knowledge. This
creates an information asymmetry where the agent might not always act solely in the best
interest of the principal. Understanding this relationship is crucial for analyzing supplier-
induced demand and healthcare quality.
8. What is the primary goal of a Cost-Utility Analysis (CUA)?
A. To find the cheapest way to perform a surgery
B. To measure outcomes in terms of Quality-Adjusted Life Years (QALYs)
C. To maximize the revenue of a healthcare facility
D. To eliminate all risks associated with a new drug
Correct Answer: B
Expert Explanation: Cost-Utility Analysis is a specific type of economic evaluation that
compares the costs of an intervention to the health gains measured in QALYs. This allows
policymakers to compare different types of medical treatments across various diseases
using a common metric. It helps in prioritizing resource allocation to maximize the overall
health benefit for a population.
9. Which of the following is an example of an ‘externality’ in healthcare?
A. A patient paying their co-pay at the clinic
