MHA710 Healthcare Economics Exam 2 v1
Questions with Correct Answers and Expert
Explanation for Each Question
1. Which of the following best describes the concept of ‘moral hazard’ in the context
of health insurance?
A. The tendency of people with higher health risks to purchase more insurance.
B. The inability of the insurer to distinguish between high-risk and low-risk
individuals.
C. The change in behavior of an insured individual that increases the expected
payout of the insurer.
D. The process where the healthy drop out of an insurance pool because premiums
are too high.
Correct Answer: C
Expert Explanation: Moral hazard refers to the behavioral response to insurance
coverage where individuals consume more healthcare because they do not bear the
full cost. This occurs because insurance lowers the marginal cost of care at the point
of service. Insurers often use deductibles and copayments to mitigate this effect by
requiring patients to share in the financial responsibility.
,2. In the Grossman Model of health capital, health is viewed as both a consumption
good and a:
A. Investment good
B. Free good
C. Public good
D. Non-durable good
Correct Answer: A
Expert Explanation: In the Grossman Model, health is considered an investment
good because it increases the amount of time available for work and leisure
activities. As an investment, individuals spend time and resources to produce health,
which depreciates over time as they age. This dual nature of health explains why
individuals invest in their well-being throughout their life cycle.
3. Adverse selection in health insurance markets is primarily caused by:
A. Government regulations limiting premium increases.
B. Asymmetric information between the buyer and the insurer.
C. High administrative costs of processing claims.
D. The monopolistic power of large hospital systems.
Correct Answer: B
,Expert Explanation: Adverse selection occurs when one party in a transaction
possesses more or better information than the other. In healthcare, individuals
usually know more about their own health status and risk factors than the insurance
company. This imbalance leads to a situation where those at higher risk are more
likely to buy insurance, potentially causing premiums to rise and healthy people to
leave the market.
4. Which payment method creates the strongest incentive for physicians to increase
the volume of services provided?
A. Capitation
B. Salary
C. Bundled payments
D. Fee-for-service
Correct Answer: D
Expert Explanation: Under a fee-for-service model, providers are paid for every
individual test or procedure they perform. This financial structure encourages the
provision of more services to increase total revenue for the practice. In contrast,
models like capitation provide a fixed payment per patient, which incentivizes
efficiency rather than volume.
, 5. The Herfindahl-Hirschman Index (HHI) is a measure used by economists to evaluate:
A. The quality of care in a specific hospital.
B. The rate of inflation in medical technology.
C. The level of market concentration and competition.
D. The efficiency of health insurance claims processing.
Correct Answer: C
Expert Explanation: The HHI is calculated by squaring the market share of each
firm in a market and summing the results. A higher HHI indicates a more
concentrated market with less competition among providers or insurers. Federal
agencies use this index to determine whether mergers and acquisitions might harm
consumers by creating monopolies or oligopolies.
6. What is the primary difference between a ‘non-profit’ and a ‘for-profit’ hospital?
A. Non-profit hospitals are not allowed to make any money.
B. For-profit hospitals do not treat emergency patients.
C. Only for-profit hospitals are required to pay property taxes.
D. Non-profit hospitals are prohibited from distributing profits to owners or
shareholders.
Correct Answer: D
Questions with Correct Answers and Expert
Explanation for Each Question
1. Which of the following best describes the concept of ‘moral hazard’ in the context
of health insurance?
A. The tendency of people with higher health risks to purchase more insurance.
B. The inability of the insurer to distinguish between high-risk and low-risk
individuals.
C. The change in behavior of an insured individual that increases the expected
payout of the insurer.
D. The process where the healthy drop out of an insurance pool because premiums
are too high.
Correct Answer: C
Expert Explanation: Moral hazard refers to the behavioral response to insurance
coverage where individuals consume more healthcare because they do not bear the
full cost. This occurs because insurance lowers the marginal cost of care at the point
of service. Insurers often use deductibles and copayments to mitigate this effect by
requiring patients to share in the financial responsibility.
,2. In the Grossman Model of health capital, health is viewed as both a consumption
good and a:
A. Investment good
B. Free good
C. Public good
D. Non-durable good
Correct Answer: A
Expert Explanation: In the Grossman Model, health is considered an investment
good because it increases the amount of time available for work and leisure
activities. As an investment, individuals spend time and resources to produce health,
which depreciates over time as they age. This dual nature of health explains why
individuals invest in their well-being throughout their life cycle.
3. Adverse selection in health insurance markets is primarily caused by:
A. Government regulations limiting premium increases.
B. Asymmetric information between the buyer and the insurer.
C. High administrative costs of processing claims.
D. The monopolistic power of large hospital systems.
Correct Answer: B
,Expert Explanation: Adverse selection occurs when one party in a transaction
possesses more or better information than the other. In healthcare, individuals
usually know more about their own health status and risk factors than the insurance
company. This imbalance leads to a situation where those at higher risk are more
likely to buy insurance, potentially causing premiums to rise and healthy people to
leave the market.
4. Which payment method creates the strongest incentive for physicians to increase
the volume of services provided?
A. Capitation
B. Salary
C. Bundled payments
D. Fee-for-service
Correct Answer: D
Expert Explanation: Under a fee-for-service model, providers are paid for every
individual test or procedure they perform. This financial structure encourages the
provision of more services to increase total revenue for the practice. In contrast,
models like capitation provide a fixed payment per patient, which incentivizes
efficiency rather than volume.
, 5. The Herfindahl-Hirschman Index (HHI) is a measure used by economists to evaluate:
A. The quality of care in a specific hospital.
B. The rate of inflation in medical technology.
C. The level of market concentration and competition.
D. The efficiency of health insurance claims processing.
Correct Answer: C
Expert Explanation: The HHI is calculated by squaring the market share of each
firm in a market and summing the results. A higher HHI indicates a more
concentrated market with less competition among providers or insurers. Federal
agencies use this index to determine whether mergers and acquisitions might harm
consumers by creating monopolies or oligopolies.
6. What is the primary difference between a ‘non-profit’ and a ‘for-profit’ hospital?
A. Non-profit hospitals are not allowed to make any money.
B. For-profit hospitals do not treat emergency patients.
C. Only for-profit hospitals are required to pay property taxes.
D. Non-profit hospitals are prohibited from distributing profits to owners or
shareholders.
Correct Answer: D
