MHA710 | MHA710 Healthcare Economics Final
Exam v3 | Questions with Correct Answers and
Expert Explanation for Each Question | Louisiana
State University in Shreveport
1. Which of the following best defines ‘Moral Hazard’ in the context of health insurance?
A. The tendency of people to buy insurance only when they are sick.
B. The inability of insurance companies to predict the risk of their pool.
C. The change in behavior that occurs when an individual is insulated from the full cost of a
service.
D. The ethical dilemma doctors face when treating uninsured patients.
Correct Answer: C
Expert Explanation: Moral hazard occurs because insurance lowers the out-of-pocket cost
of healthcare for the consumer. When the effective price is reduced, individuals tend to
consume more medical services than they would if they paid the full price. This behavioral
change can lead to social waste and higher overall healthcare spending.
2. In the Grossman Model, how is health viewed by the individual?
A. Only as a consumption good.
B. Only as an investment good.
C. Both as a consumption good and an investment good.
D. Neither as a consumption nor an investment good.
Correct Answer: C
Expert Explanation: The Grossman Model posits that health provides direct utility,
making it a consumption good. Additionally, health increases the amount of ‘healthy time’
available for work and leisure, making it an investment good. This dual nature explains
why individuals allocate time and resources to produce health capital over their lifetime.
3. Which concept describes the situation where sick people are more likely to buy insurance
than healthy people?
A. Adverse Selection
B. Moral Hazard
C. Risk Aversion
D. Supplier-Induced Demand
,Correct Answer: A
Expert Explanation: Adverse selection arises from asymmetric information where the
buyer knows more about their health status than the insurer. This leads to a
disproportionate number of high-risk individuals in the insurance pool. Over time, this can
cause premiums to rise, driving out healthy individuals and potentially leading to a market
collapse.
4. What was the primary finding of the RAND Health Insurance Experiment regarding cost-
sharing?
A. Increased cost-sharing significantly reduced the use of medical services.
B. Cost-sharing had no impact on the use of medical services.
C. People with free care had worse health outcomes than those with cost-sharing.
D. Cost-sharing only reduced the use of unnecessary services.
Correct Answer: A
Expert Explanation: The RAND experiment demonstrated that as the level of cost-sharing
increased, the demand for medical services decreased. Interestingly, the reduction
occurred for both highly effective and less effective care. This finding suggests that
consumers are price-sensitive when it comes to healthcare utilization.
5. Which of the following represents an ‘externality’ in healthcare?
A. A patient paying for a surgery.
B. An individual getting a flu vaccine and protecting others from infection.
C. A doctor prescribing a specific brand of medication.
D. An insurance company raising its annual premiums.
Correct Answer: B
Expert Explanation: An externality occurs when a transaction between two parties
imposes costs or benefits on a third party who is not involved. Vaccinations provide a
positive externality because they contribute to herd immunity, reducing the risk for
everyone. Because individuals don’t always consider these social benefits, markets may
under-supply vaccines without intervention.
6. What does the ‘Loading Fee’ in an insurance premium represent?
A. The portion of the premium used to pay for medical claims.
B. The amount used to cover administrative costs, marketing, and profit.
C. The deductible that the patient must pay out-of-pocket.
D. The government subsidy provided to low-income families.
, Correct Answer: B
Expert Explanation: The loading fee is the difference between the total premium and the
actuarially fair premium. It covers the insurer’s operational expenses beyond the actual
payment of medical claims. A high loading fee makes insurance less attractive to
consumers, particularly those who are risk-neutral.
7. In healthcare economics, ‘Physician-Induced Demand’ refers to:
A. Patients requesting more tests than they need.
B. An increase in the supply of doctors leading to lower prices.
C. The government mandating certain medical procedures.
D. Physicians using their information advantage to encourage patients to consume more
care.
Correct Answer: D
Expert Explanation: Physician-induced demand occurs because of the agency relationship
where patients rely on doctors for expert advice. Doctors may recommend services that
provide marginal benefit but increase their own income. This theory highlights the
potential conflict of interest inherent in fee-for-service payment models.
8. What is the ‘Actuarially Fair Premium’?
A. The premium set by the government to ensure affordability.
B. The premium equal to the expected payout for the individual or group.
C. The lowest price a company can charge while still making a profit.
D. A premium that is the same for every person in a geographic area.
Correct Answer: B
Expert Explanation: The actuarially fair premium represents the expected value of the
loss to be covered by the insurance. In a perfectly competitive market with no
administrative costs, this would be the price of the policy. It ensures that, on average, the
insurance company collects enough to pay for all claims but does not include extra for
overhead.
9. The Oregon Medicaid Health Experiment found that having Medicaid coverage:
A. Increased emergency room use and improved mental health/financial stability.
B. Significantly improved physical health outcomes like blood pressure.
C. Reduced the overall cost of care for the state government.
D. Had no measurable impact on healthcare utilization.
Correct Answer: A
Exam v3 | Questions with Correct Answers and
Expert Explanation for Each Question | Louisiana
State University in Shreveport
1. Which of the following best defines ‘Moral Hazard’ in the context of health insurance?
A. The tendency of people to buy insurance only when they are sick.
B. The inability of insurance companies to predict the risk of their pool.
C. The change in behavior that occurs when an individual is insulated from the full cost of a
service.
D. The ethical dilemma doctors face when treating uninsured patients.
Correct Answer: C
Expert Explanation: Moral hazard occurs because insurance lowers the out-of-pocket cost
of healthcare for the consumer. When the effective price is reduced, individuals tend to
consume more medical services than they would if they paid the full price. This behavioral
change can lead to social waste and higher overall healthcare spending.
2. In the Grossman Model, how is health viewed by the individual?
A. Only as a consumption good.
B. Only as an investment good.
C. Both as a consumption good and an investment good.
D. Neither as a consumption nor an investment good.
Correct Answer: C
Expert Explanation: The Grossman Model posits that health provides direct utility,
making it a consumption good. Additionally, health increases the amount of ‘healthy time’
available for work and leisure, making it an investment good. This dual nature explains
why individuals allocate time and resources to produce health capital over their lifetime.
3. Which concept describes the situation where sick people are more likely to buy insurance
than healthy people?
A. Adverse Selection
B. Moral Hazard
C. Risk Aversion
D. Supplier-Induced Demand
,Correct Answer: A
Expert Explanation: Adverse selection arises from asymmetric information where the
buyer knows more about their health status than the insurer. This leads to a
disproportionate number of high-risk individuals in the insurance pool. Over time, this can
cause premiums to rise, driving out healthy individuals and potentially leading to a market
collapse.
4. What was the primary finding of the RAND Health Insurance Experiment regarding cost-
sharing?
A. Increased cost-sharing significantly reduced the use of medical services.
B. Cost-sharing had no impact on the use of medical services.
C. People with free care had worse health outcomes than those with cost-sharing.
D. Cost-sharing only reduced the use of unnecessary services.
Correct Answer: A
Expert Explanation: The RAND experiment demonstrated that as the level of cost-sharing
increased, the demand for medical services decreased. Interestingly, the reduction
occurred for both highly effective and less effective care. This finding suggests that
consumers are price-sensitive when it comes to healthcare utilization.
5. Which of the following represents an ‘externality’ in healthcare?
A. A patient paying for a surgery.
B. An individual getting a flu vaccine and protecting others from infection.
C. A doctor prescribing a specific brand of medication.
D. An insurance company raising its annual premiums.
Correct Answer: B
Expert Explanation: An externality occurs when a transaction between two parties
imposes costs or benefits on a third party who is not involved. Vaccinations provide a
positive externality because they contribute to herd immunity, reducing the risk for
everyone. Because individuals don’t always consider these social benefits, markets may
under-supply vaccines without intervention.
6. What does the ‘Loading Fee’ in an insurance premium represent?
A. The portion of the premium used to pay for medical claims.
B. The amount used to cover administrative costs, marketing, and profit.
C. The deductible that the patient must pay out-of-pocket.
D. The government subsidy provided to low-income families.
, Correct Answer: B
Expert Explanation: The loading fee is the difference between the total premium and the
actuarially fair premium. It covers the insurer’s operational expenses beyond the actual
payment of medical claims. A high loading fee makes insurance less attractive to
consumers, particularly those who are risk-neutral.
7. In healthcare economics, ‘Physician-Induced Demand’ refers to:
A. Patients requesting more tests than they need.
B. An increase in the supply of doctors leading to lower prices.
C. The government mandating certain medical procedures.
D. Physicians using their information advantage to encourage patients to consume more
care.
Correct Answer: D
Expert Explanation: Physician-induced demand occurs because of the agency relationship
where patients rely on doctors for expert advice. Doctors may recommend services that
provide marginal benefit but increase their own income. This theory highlights the
potential conflict of interest inherent in fee-for-service payment models.
8. What is the ‘Actuarially Fair Premium’?
A. The premium set by the government to ensure affordability.
B. The premium equal to the expected payout for the individual or group.
C. The lowest price a company can charge while still making a profit.
D. A premium that is the same for every person in a geographic area.
Correct Answer: B
Expert Explanation: The actuarially fair premium represents the expected value of the
loss to be covered by the insurance. In a perfectly competitive market with no
administrative costs, this would be the price of the policy. It ensures that, on average, the
insurance company collects enough to pay for all claims but does not include extra for
overhead.
9. The Oregon Medicaid Health Experiment found that having Medicaid coverage:
A. Increased emergency room use and improved mental health/financial stability.
B. Significantly improved physical health outcomes like blood pressure.
C. Reduced the overall cost of care for the state government.
D. Had no measurable impact on healthcare utilization.
Correct Answer: A
