27) If a doctor knows that an insurance company will pay for most of a patient’s bill, the doctor
has more of an incentive to require additional medical procedures and tests, even if the patient
may not require them. This is an example of
A) moral hazard.
B) the principle-agent problem.
C) asymmetric information.
D) adverse selection.
28) Suppose a large firm allows its employees to choose whether to participate in its health
insurance plan. The firm is trying to decide between two plans: Plan I has a low monthly
premium but a high deductible, and Plan II has a high monthly premium but a low deductible.
Under which plan is adverse selection likely to be a bigger problem?
A) Plan I because it is likely to draw participants who expect high medical costs. This group
expects to consume much health care services and therefore prefer low deductibles.
B) Plan II because it is likely to draw participants who expect high medical costs. Healthy
individuals who do not expect to consume much health care services will not be willing to pay
the high premiums.
C) Plan I because it is likely to draw the relatively healthy employees who do not expect to spend
much on health care. Because the monthly premiums are low, the insurance company has to bear
a bigger financial burden in the event of serious illnesses.
D) Plan II because it is likely to draw employees who tend to over-consume health care services
because of the low deductible. Insurance companies are likely to end up paying out more claims
than the premiums they collect.
29) Vaccinating people against a communicable disease such as influenza not only reduces the
chances that the person vaccinated will catch the disease but also reduces the probability that an
epidemic of the disease will occur. Which of the following statements is true?
A) Reducing the chances that the person vaccinated will catch the disease is a private cost while
reducing the probability of an influenza epidemic is a social benefit.
B) Vaccinating people against communicable diseases yields private benefits in excess of social
benefits.
C) Reducing the chances that the person vaccinated will catch the disease is a private benefit
while reducing the probability of an influenza epidemic is a social benefit.
D) The benefits of the influenza vaccination outweigh the costs.
30) In the United States, the bulk of health care spending is paid by health insurance companies.
Such a system is also called a third-party payer system where consumers of health care pay a
nominal fee and the rest are paid by the health insurance provider. Why might such a system
lead to an inefficient outcome?
A) Health insurance companies have an incentive to control cost and therefore tend to deny
consumers many cutting edge medical treatments.
B) Consumers have an incentive to over-consume health care services because they pay prices
well below the cost of providing these services.
C) Physicians concerned that insurance companies may not approve payments tend not to order
expensive tests for their patients.
D) Consumers fearing that excessive use of health care services may lead to a rise in insurance
premiums tend to under-consume health care services.
31) How do current tax laws in the United States favor employer-based health care insurance?
A) Individuals who receive health insurance benefits are allowed to deduct the value of these
benefits from their taxable income.
B) Employers who provide health insurance benefits are reimbursed by the government and are
not taxed on these reimbursements.
C) Individuals who receive health insurance benefits do not pay taxes on the value of these
benefits.
D) Health insurance companies that provide insurance to employers are subject to a lower tax
rate than those insurance companies that provide insurance to private individuals.
32) One effect of adverse selection in a market is that the equilibrium quantity of the product
may
be smaller than it would have been if there were no information problems.
33) The situation in which one party to a transaction takes advantage of knowing more than the
other party to the transaction is known as asymmetric information.
34) If a state requires all drivers to buy health insurance, the problem of adverse selection is
eliminated.
35) A doctor pursuing his own interests rather than the interests of his patients is an example of
the principal-agent problem.
36) Moral hazard refers to the actions people take after they have entered into a transaction that
make the other party to the transaction worse off.
37) Health insurance companies impose deductibles on policies and co-payments on claims to
reduce the problem of adverse selection.
38) What is adverse selection?
39) Suppose you see a 2006 Scion xB Sport Wagon advertised in the local newspaper for $8,500.
If you knew the car was reliable, you would be willing to pay $10,000 for it. If you knew the car
was unreliable, you would only be willing to pay $5,500 for it. Under what circumstances should
you buy the car?
40) What is moral hazard?
41) Suggest three ways by which health insurance companies can reduce adverse selection?
42) What is an externality? Explain how someone receiving a meningitis vaccination is an
example of an externality in the market for health care.
7.4 The Debate Over Health Care Policy in the United States
1) By the year 2019, health care’s share of gross domestic product in the United States is
projected to
A) return to its 1995 level.
B) have declined to only 6.5 percent.
C) be more than three times as high as it was in 1965.
D) reach a level of 75 percent.
2) In the United States, total health care spending per person has been ________, and out-of-
pocket spending on health care per person has been ________.
A) rising; rising
B) rising; falling
C) falling; rising
D) falling; falling
3) Compared to other high-income countries, health care spending per person in the United
States has been
A) growing at a faster rate.
B) declining at a faster rate.
C) growing at approximately the same rate.
D) declining at approximately the same rate.
4) Based on the current rate of growth, health care spending as a percentage of GDP through
Medicare, Medicaid, and other U.S. government programs is expected to
A) stabilize within the next 20 years.
B) account for a majority of spending as a percentage of GDP within 5 years.
C) slow down during this decade.
D) more than double over the next 40 years.
5) The Congressional Budget Office estimates that the payments to settle malpractice lawsuits
and the premiums doctors pay for malpractice insurance account for ________ of health care
costs in the United States.
A) between 20 and 30 percent
B) roughly half
C) less than 1 percent
D) a vast majority
6) Uninsured patients receiving treatments at hospital emergency rooms that could have been
provided less expensively at doctor’s offices account for ________ of health care costs in the
United States.
A) between 1 and 4 percent
B) approximately 25 percent
C) almost 40 percent
D) between 15 and 20 percent
7) Growth in labor productivity in health care has been ________ labor productivity in the
economy as a whole.
A) approximately equal to
B) slightly faster than
C) almost twice as fast as
D) less than half as fast as
8) Of the following, which has most likely contributed the most to the rapid rise in health care
costs in the United States?
A) the cost of malpractice insurance
B) the cost to treat uninsured patients
C) slow growth in labor productivity in health care
D) the cost of malpractice lawsuit settlements
9) The aging of the U.S. population has tended to ________ spending on health care, and the
development of new drugs and medical equipment has tended to ________ spending on health
care.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
10) In the United States, health care spending on people over age 65 is ________ on people aged
18 to 24.
A) one third as much as
B) twice as much as
C) six times greater than
D) forty times greater than
11) The number of people receiving Medicare is expected to ________ by the year 2030.
A) reach 5 million by
B) stabilize
C) decline by 10 percent
D) grow to 80 million
12) The Congressional Budget Office estimates that most of the increase in federal spending on
Medicare and Medicaid will be due to
A) the aging population.
B) increases in the cost of providing health care.
C) increases in immigration.
D) declining income levels.
13) In the United States, consumers usually pay ________ than the true cost of medical treatment
because of ________.
A) more; adverse selection
B) more; rising insurance premiums
C) less; third-party payers
D) less; rising insurance deductibles
14) Because consumers who have insurance provided by their employers usually only pay a
deductible for a visit to the doctor’s office,
A) they demand a larger quantity of health care services than they would if they paid a price that
better represented the true cost of providing the service.
B) they demand a smaller quantity of health care services than they would if they paid a price
that better represented the true cost of providing the service.
C) the doctors supply a smaller quantity of health care services than they would if the consumer
paid a price that better represented the true cost of providing the service.
D) the insurance companies provide a larger quantity of health care services than they would if
the consumer paid a price that better represented the true cost of providing the service.
15) Because consumers who have insurance provided by their employers usually only pay a
deductible for a visit to the doctor’s office,
A) employers have more incentive to allow employees time off for doctor visits.
B) doctors have less incentive to control their costs.
C) insurance companies have more incentive to approve medical procedures for their policy
holders.
D) consumers have less incentive to visit the doctor’s office on a more frequent basis.
16) All of the following are part of the “individual mandate” provision of the Patient Protection
and Affordable Care Act (PPACA) except
A) individuals are allowed to opt out of the insurance program if they can prove they have no
serious health issues and do so before the act fully takes effect in the year 2012.
B) by 2018, fines for not having health insurance will be the greater of $895 per person or 2.5
percent of income.
C) beginning in 2014, individuals who do not acquire health insurance will be subject to a fine.
D) with limited exceptions, every resident of the United States will be required to have health
insurance that meets certain basic requirements.