MHA710 Healthcare Economics Exam 2 v2
Questions with Correct Answers and Expert
Explanation for Each Question
1. Which of the following best describes the concept of ‘Adverse Selection’ in health
insurance markets?
A. When patients utilize more services because they are insured.
B. When insurers select only healthy individuals to minimize costs.
C. When individuals with higher health risks are more likely to purchase insurance.
D. When the government mandates all citizens to have insurance coverage.
Correct Answer: C
Expert Explanation: Adverse selection occurs because potential insured
individuals have more information about their health status than the insurer. This
information asymmetry leads high-risk individuals to seek coverage more
aggressively than low-risk individuals. As a result, the insurance pool becomes
riskier, which can lead to higher premiums and a potential market collapse.
2. In the context of health economics, what is the ‘Moral Hazard’ phenomenon?
A. The tendency for insurance coverage to increase the demand for healthcare
services.
B. The ethical dilemma physicians face when recommending expensive treatments.
,C. The lack of health education among low-income populations.
D. The refusal of insurance companies to cover pre-existing conditions.
Correct Answer: A
Expert Explanation: Moral hazard refers to the change in behavior of an individual
after they become insured. Because the out-of-pocket cost is reduced, individuals
may consume more medical care than they would if they paid the full price. This
behavioral shift can lead to inefficiencies and increased overall healthcare spending.
3. The ‘Agency Relationship’ in healthcare primarily refers to the interaction between:
A. Patients (principals) and physicians (agents).
B. Pharmaceutical companies and research institutions.
C. Insurance companies and government regulators.
D. Hospitals and medical equipment suppliers.
Correct Answer: A
Expert Explanation: In healthcare, patients often lack the medical knowledge to
make informed decisions and thus delegate this authority to physicians. The
physician acts as an agent making decisions on behalf of the patient, who is the
principal. Conflicts can arise if the physician’s incentives do not perfectly align with
the patient’s health interests.
,4. Which economic model explains why physicians might recommend more services
when their income is threatened?
A. Consumer Utility Model
B. Perfect Competition Model
C. Supplier-Induced Demand
D. Monopolistic Competition
Correct Answer: C
Expert Explanation: Supplier-induced demand (SID) suggests that physicians can
use their information advantage to shift the patient’s demand curve. When physician
fees decrease, they may recommend more tests or procedures to maintain a target
income level. This concept challenges the traditional economic view that supply and
demand are independent.
5. What is the primary difference between Cost-Benefit Analysis (CBA) and Cost-
Effectiveness Analysis (CEA)?
A. CBA measures outcomes in natural units like life years saved.
B. CEA measures both costs and outcomes in monetary terms.
C. CBA measures both costs and outcomes in monetary terms.
D. CEA is only used for private sector investment decisions.
, Correct Answer: C
Expert Explanation: Cost-Benefit Analysis requires all inputs and outputs to be
translated into dollar values to determine if an investment is worthwhile. Cost-
Effectiveness Analysis, however, compares the relative costs and outcomes (like
deaths averted) of different interventions. CEA is often preferred in healthcare
because it avoids the ethical difficulty of placing a specific dollar value on a human
life.
6. A ‘Quality-Adjusted Life Year’ (QALY) is used primarily in which type of analysis?
A. Cost-Utility Analysis
B. Accounting Profit Analysis
C. Market Share Analysis
D. Revenue Cycle Management
Correct Answer: A
Expert Explanation: QALYs are a key metric in Cost-Utility Analysis used to
compare different medical interventions. They combine both the quantity (years of
life) and the quality (health status) into a single index. This allows researchers to
compare the value of treatments across very different types of diseases.
7. The ‘Grossman Model’ views health as which of the following?
A. A random occurrence determined by genetics.
Questions with Correct Answers and Expert
Explanation for Each Question
1. Which of the following best describes the concept of ‘Adverse Selection’ in health
insurance markets?
A. When patients utilize more services because they are insured.
B. When insurers select only healthy individuals to minimize costs.
C. When individuals with higher health risks are more likely to purchase insurance.
D. When the government mandates all citizens to have insurance coverage.
Correct Answer: C
Expert Explanation: Adverse selection occurs because potential insured
individuals have more information about their health status than the insurer. This
information asymmetry leads high-risk individuals to seek coverage more
aggressively than low-risk individuals. As a result, the insurance pool becomes
riskier, which can lead to higher premiums and a potential market collapse.
2. In the context of health economics, what is the ‘Moral Hazard’ phenomenon?
A. The tendency for insurance coverage to increase the demand for healthcare
services.
B. The ethical dilemma physicians face when recommending expensive treatments.
,C. The lack of health education among low-income populations.
D. The refusal of insurance companies to cover pre-existing conditions.
Correct Answer: A
Expert Explanation: Moral hazard refers to the change in behavior of an individual
after they become insured. Because the out-of-pocket cost is reduced, individuals
may consume more medical care than they would if they paid the full price. This
behavioral shift can lead to inefficiencies and increased overall healthcare spending.
3. The ‘Agency Relationship’ in healthcare primarily refers to the interaction between:
A. Patients (principals) and physicians (agents).
B. Pharmaceutical companies and research institutions.
C. Insurance companies and government regulators.
D. Hospitals and medical equipment suppliers.
Correct Answer: A
Expert Explanation: In healthcare, patients often lack the medical knowledge to
make informed decisions and thus delegate this authority to physicians. The
physician acts as an agent making decisions on behalf of the patient, who is the
principal. Conflicts can arise if the physician’s incentives do not perfectly align with
the patient’s health interests.
,4. Which economic model explains why physicians might recommend more services
when their income is threatened?
A. Consumer Utility Model
B. Perfect Competition Model
C. Supplier-Induced Demand
D. Monopolistic Competition
Correct Answer: C
Expert Explanation: Supplier-induced demand (SID) suggests that physicians can
use their information advantage to shift the patient’s demand curve. When physician
fees decrease, they may recommend more tests or procedures to maintain a target
income level. This concept challenges the traditional economic view that supply and
demand are independent.
5. What is the primary difference between Cost-Benefit Analysis (CBA) and Cost-
Effectiveness Analysis (CEA)?
A. CBA measures outcomes in natural units like life years saved.
B. CEA measures both costs and outcomes in monetary terms.
C. CBA measures both costs and outcomes in monetary terms.
D. CEA is only used for private sector investment decisions.
, Correct Answer: C
Expert Explanation: Cost-Benefit Analysis requires all inputs and outputs to be
translated into dollar values to determine if an investment is worthwhile. Cost-
Effectiveness Analysis, however, compares the relative costs and outcomes (like
deaths averted) of different interventions. CEA is often preferred in healthcare
because it avoids the ethical difficulty of placing a specific dollar value on a human
life.
6. A ‘Quality-Adjusted Life Year’ (QALY) is used primarily in which type of analysis?
A. Cost-Utility Analysis
B. Accounting Profit Analysis
C. Market Share Analysis
D. Revenue Cycle Management
Correct Answer: A
Expert Explanation: QALYs are a key metric in Cost-Utility Analysis used to
compare different medical interventions. They combine both the quantity (years of
life) and the quality (health status) into a single index. This allows researchers to
compare the value of treatments across very different types of diseases.
7. The ‘Grossman Model’ views health as which of the following?
A. A random occurrence determined by genetics.
