MHA710 | MHA710 Healthcare Economics Exam 4
v3 | Questions with Correct Answers and Expert
Explanation for Each Question | Louisiana State
University in Shreveport
1. Which of the following best defines the concept of ‘adverse selection’ in health insurance
markets?
A. Insurers choosing only the healthiest patients to cover
B. The tendency for insurance premiums to decrease as more people join
C. Doctors providing more care than necessary because patients are insured
D. Individuals with higher health risks being more likely to buy insurance
Correct Answer: D
Expert Explanation: Adverse selection occurs when there is an information asymmetry
between the buyer and the insurer. Individuals who know they have higher health risks are
more motivated to purchase insurance, while healthy individuals might opt out. This
imbalance can lead to a ‘death spiral’ where premiums rise continuously to cover the costs
of the high-risk pool.
2. What is the primary economic rationale for ‘Certificate of Need’ (CON) laws in the
healthcare sector?
A. To encourage competition among local hospitals
B. To provide subsidies to rural health clinics
C. To ensure that all physicians are board-certified before practicing
D. To prevent the unnecessary duplication of expensive medical facilities and equipment
Correct Answer: D
Expert Explanation: CON laws are regulatory measures intended to control healthcare
costs by requiring state approval for major capital expenditures. The theory is that excess
capacity in the market leads to higher prices and inefficient resource allocation. By limiting
supply, regulators hope to ensure that facilities are only built where a genuine community
need exists.
3. In the context of the Grossman Model, health is viewed as which of the following?
A. A pure consumption good only
B. A capital good that depreciates over time
C. An externality that affects the whole community
,D. A fixed resource that cannot be changed by individual behavior
Correct Answer: B
Expert Explanation: The Grossman Model treats health as a durable capital stock that
yields ‘healthy time’ as an output. Individuals invest in their health through medical care,
diet, and exercise to offset the natural rate of depreciation that occurs with age. This model
explains how education and income influence the demand for health and healthcare
services.
4. Which part of the Medicare program is primarily responsible for covering physician services
and outpatient care?
A. Medicare Part A
B. Medicare Part C
C. Medicare Part B
D. Medicare Part D
Correct Answer: C
Expert Explanation: Medicare Part B is the voluntary portion of Medicare that covers
medically necessary services like doctors’ visits and preventive care. Part A covers hospital
stays, while Part D is focused specifically on prescription drug coverage. Understanding
these distinctions is vital for analyzing federal spending on elderly healthcare.
5. What does ‘moral hazard’ refer to in the healthcare insurance industry?
A. Insurers refusing to pay for legitimate medical claims
B. Individuals taking fewer health risks because they are afraid of the hospital
C. Insured individuals consuming more healthcare because they don’t face the full cost
D. Physicians charging higher rates to patients without insurance
Correct Answer: C
Expert Explanation: Moral hazard describes the behavioral change that occurs when an
individual is shielded from the financial consequences of their actions. Because insurance
lowers the marginal cost of healthcare to the consumer, they are likely to utilize more
services than they would otherwise. Co-payments and deductibles are common tools used
by insurers to mitigate this effect.
6. Which of the following describes a ‘natural monopoly’ in the healthcare industry?
A. A small rural hospital that is the only provider in a 100-mile radius
B. A pharmaceutical company with a 20-year patent
C. A large urban hospital that uses aggressive marketing
, D. A government-run health system with no private competition
Correct Answer: A
Expert Explanation: A natural monopoly occurs when the fixed costs of production are so
high that it is most efficient for a single firm to serve the entire market. In healthcare, this
often happens in sparsely populated areas where the volume of patients can only support
one hospital. In such cases, competition is often absent because the market size cannot
sustain multiple providers.
7. The ‘Medical Loss Ratio’ (MLR) is a measure used to determine:
A. The percentage of patients who experience medical errors
B. The ratio of physician salaries to administrative costs
C. The total loss incurred by hospitals due to uncompensated care
D. The share of premium dollars spent on clinical services and quality improvement
Correct Answer: D
Expert Explanation: The Affordable Care Act mandates specific Medical Loss Ratios to
ensure that insurance companies spend the majority of premium income on actual
healthcare. If an insurer’s MLR falls below the required threshold (80% or 85%), they must
issue rebates to their policyholders. This regulation is designed to limit the amount of
money spent on overhead, marketing, and executive profits.
8. What is the ‘opportunity cost’ of a patient spending three hours at a doctor’s office?
A. The co-payment paid at the front desk
B. The cost of the medical supplies used during the visit
C. The value of the next best alternative use of the patient’s time
D. The total bill submitted to the insurance company
Correct Answer: C
Expert Explanation: Opportunity cost is a fundamental economic principle representing
the benefits an individual misses out on when choosing one alternative over another. For a
patient, this includes lost wages if they had to leave work or the value of leisure time
sacrificed. Measuring these time costs is essential for a complete economic evaluation of
healthcare interventions.
9. In healthcare economics, what does the ‘Triple Aim’ refer to?
A. Profit, Growth, and Market Share
B. Diagnosis, Treatment, and Prevention
C. Cost, Quality, and Access
v3 | Questions with Correct Answers and Expert
Explanation for Each Question | Louisiana State
University in Shreveport
1. Which of the following best defines the concept of ‘adverse selection’ in health insurance
markets?
A. Insurers choosing only the healthiest patients to cover
B. The tendency for insurance premiums to decrease as more people join
C. Doctors providing more care than necessary because patients are insured
D. Individuals with higher health risks being more likely to buy insurance
Correct Answer: D
Expert Explanation: Adverse selection occurs when there is an information asymmetry
between the buyer and the insurer. Individuals who know they have higher health risks are
more motivated to purchase insurance, while healthy individuals might opt out. This
imbalance can lead to a ‘death spiral’ where premiums rise continuously to cover the costs
of the high-risk pool.
2. What is the primary economic rationale for ‘Certificate of Need’ (CON) laws in the
healthcare sector?
A. To encourage competition among local hospitals
B. To provide subsidies to rural health clinics
C. To ensure that all physicians are board-certified before practicing
D. To prevent the unnecessary duplication of expensive medical facilities and equipment
Correct Answer: D
Expert Explanation: CON laws are regulatory measures intended to control healthcare
costs by requiring state approval for major capital expenditures. The theory is that excess
capacity in the market leads to higher prices and inefficient resource allocation. By limiting
supply, regulators hope to ensure that facilities are only built where a genuine community
need exists.
3. In the context of the Grossman Model, health is viewed as which of the following?
A. A pure consumption good only
B. A capital good that depreciates over time
C. An externality that affects the whole community
,D. A fixed resource that cannot be changed by individual behavior
Correct Answer: B
Expert Explanation: The Grossman Model treats health as a durable capital stock that
yields ‘healthy time’ as an output. Individuals invest in their health through medical care,
diet, and exercise to offset the natural rate of depreciation that occurs with age. This model
explains how education and income influence the demand for health and healthcare
services.
4. Which part of the Medicare program is primarily responsible for covering physician services
and outpatient care?
A. Medicare Part A
B. Medicare Part C
C. Medicare Part B
D. Medicare Part D
Correct Answer: C
Expert Explanation: Medicare Part B is the voluntary portion of Medicare that covers
medically necessary services like doctors’ visits and preventive care. Part A covers hospital
stays, while Part D is focused specifically on prescription drug coverage. Understanding
these distinctions is vital for analyzing federal spending on elderly healthcare.
5. What does ‘moral hazard’ refer to in the healthcare insurance industry?
A. Insurers refusing to pay for legitimate medical claims
B. Individuals taking fewer health risks because they are afraid of the hospital
C. Insured individuals consuming more healthcare because they don’t face the full cost
D. Physicians charging higher rates to patients without insurance
Correct Answer: C
Expert Explanation: Moral hazard describes the behavioral change that occurs when an
individual is shielded from the financial consequences of their actions. Because insurance
lowers the marginal cost of healthcare to the consumer, they are likely to utilize more
services than they would otherwise. Co-payments and deductibles are common tools used
by insurers to mitigate this effect.
6. Which of the following describes a ‘natural monopoly’ in the healthcare industry?
A. A small rural hospital that is the only provider in a 100-mile radius
B. A pharmaceutical company with a 20-year patent
C. A large urban hospital that uses aggressive marketing
, D. A government-run health system with no private competition
Correct Answer: A
Expert Explanation: A natural monopoly occurs when the fixed costs of production are so
high that it is most efficient for a single firm to serve the entire market. In healthcare, this
often happens in sparsely populated areas where the volume of patients can only support
one hospital. In such cases, competition is often absent because the market size cannot
sustain multiple providers.
7. The ‘Medical Loss Ratio’ (MLR) is a measure used to determine:
A. The percentage of patients who experience medical errors
B. The ratio of physician salaries to administrative costs
C. The total loss incurred by hospitals due to uncompensated care
D. The share of premium dollars spent on clinical services and quality improvement
Correct Answer: D
Expert Explanation: The Affordable Care Act mandates specific Medical Loss Ratios to
ensure that insurance companies spend the majority of premium income on actual
healthcare. If an insurer’s MLR falls below the required threshold (80% or 85%), they must
issue rebates to their policyholders. This regulation is designed to limit the amount of
money spent on overhead, marketing, and executive profits.
8. What is the ‘opportunity cost’ of a patient spending three hours at a doctor’s office?
A. The co-payment paid at the front desk
B. The cost of the medical supplies used during the visit
C. The value of the next best alternative use of the patient’s time
D. The total bill submitted to the insurance company
Correct Answer: C
Expert Explanation: Opportunity cost is a fundamental economic principle representing
the benefits an individual misses out on when choosing one alternative over another. For a
patient, this includes lost wages if they had to leave work or the value of leisure time
sacrificed. Measuring these time costs is essential for a complete economic evaluation of
healthcare interventions.
9. In healthcare economics, what does the ‘Triple Aim’ refer to?
A. Profit, Growth, and Market Share
B. Diagnosis, Treatment, and Prevention
C. Cost, Quality, and Access
