Microeconomics Special Topic 7—The Economics of Healthcare
MULTIPLE CHOICE
1. Real expenditures on Medicare and Medicaid
a.
rose during the 1970s and 1980s, but they have been declining since 1990.
b.
fell during the 1970s and 1980s, but they have been increasing since 1990.
c.
increased at about the same rate as real GDP during the last three decades.
d.
have approximately doubled during each of the last three decades.
2. Which of the following is true?
a.
The growth of third-party payments during the last several decades has helped control
inflation in the health-care sector.
b.
Public policy encourages Americans to purchase low deductible/low co-payment health
insurance coverage through their employers.
c.
Low deductible health insurance coverage encourages health-care consumers to search for
the best prices.
d.
The 2.9 percent Medicare payroll tax is sufficient to cover the cost of the promised future
health-care services to senior citizens.
3. During the last four decades, the share of health-care expenditures paid for by third parties (either the
government or insurance companies)
a.
has remained relatively constant.
b.
fell from approximately 60 percent in 1960 to 30 percent in 2007.
c.
increased from approximately 45 percent in 1960 to over 85 percent in 2007.
d.
declined during the 15 years following the passage of Medicare but has been increasing
since 1980.
4. Does it make any difference whether health-care expenditures are paid for by the consumer or by a
third party (the government or an insurance company, for example)?
a.
No; the quantity of health-care service demanded is not influenced by either the price of
health care or who is paying for it.
b.
Yes; consumers of health care will have a stronger incentive to economize when they are
buying the service with their own money.
c.
Yes; consumers of health-care services will have a stronger incentive to economize when
the services are paid for by a third party.
d.
No; health care is an essential service, and therefore, the incentive to economize on it is
unaffected by who is paying for the service.
5. Given the current structure of health-care finance, which of the following is most likely to occur when
the baby boom generation begins to retire and the elderly population increases rapidly during the years
following 2010?
a.
The demand for health-care services will decrease.
b.
The prices of health-care services will grow less rapidly than has been the case during the
last three decades.
c.
The real (adjusted for inflation) expenditures on Medicare and the taxes to finance the
program will tend to decline.
d.
The health-care inflation and spending growth of recent decades will continue or even
accelerate.
6. Which of the following is true?
a.
Healthcare in Canada and most of the European countries is a socialized industry.
b.
Socialization of the healthcare industry eliminates the problem of scarcity in the healthcare
industry.
c.
The high-income countries of Europe are able to provide as much healthcare, free of
charge, as their citizens want.
d.
All of the above are true.
7. A 2.9 percent payroll tax (1.45 percent levied on both the employee and the employer) imposed on
current workers is used to finance the
a.
Medicaid program that provides healthcare for the poor.
b.
hospitalization costs of Medicare beneficiaries.
c.
cost of physician services supplied to the elderly.
d.
healthcare costs of both the elderly and the poor.
8. Which of the following is fully tax deductible (it is either subtracted or excluded from taxable income)
under the current tax system of the United States?
a.
out–of-pocket medical expenses
b.
healthcare insurance purchased through one’s employer
c.
healthcare insurance purchased directly by an individual or family
d.
all of the above
9. When health insurance is purchased primarily through one’s employer,
a.
direct purchase of health insurance becomes cheaper.
b.
the benefits of the healthcare insurance are fully taxable.
c.
it is more costly for employees to switch jobs and move to areas where jobs are available.
d.
the overall number of people without health insurance decreases.
10. Why is the current U.S. tax-treatment of health insurance purchased through one’s employer
discriminatory?
a.
Health insurance should not be a tax-deductible expense for anyone.
b.
The system gives preferential tax treatment to self-employed individuals.
c.
The system imposes higher taxes on the direct purchase of health insurance because it is
not tax deductible.
d.
The system gives preferential tax treatment to people who purchase health insurance
directly from a provider.
11. What percentage of U.S. healthcare expenditures is currently paid for by a third party, either the
government or an insurance company?
a.
less than 10 percent
b.
approximately 30 percent
c.
approximately 50 percent
d.
more than 85 percent
12. Third-party payments by either the government or an insurance company accounted for ____ of the
2009 healthcare expenditures, compared to ____ paid by third parties in 1960.
a.
40 percent; 20 percent
b.
20 percent; 40 percent
c.
86 percent; 45 percent
d.
96 percent; 73 percent
13. As third-party payments and government expenditures on healthcare increased following the passage
of Medicare and Medicaid,
a.
total expenditures on healthcare declined.
b.
the incentive of consumers to economize on their use of healthcare services increased.
c.
the incentive of suppliers to provide healthcare services at a low cost increased.
d.
both the prices of healthcare services and total expenditures on those services increased
rapidly.
14. Which of the following grew rapidly after the passage of the Medicare and Medicaid programs in the
mid-1960s?
a.
the share of healthcare expenditures financed directly by the consumer
b.
the share of healthcare expenditures financed by third parties
c.
the prices of healthcare relative to the prices of other goods and services
d.
both b and c
15. Which of the following grew rapidly during the years following the passage of the Medicare and
Medicaid programs?
a.
the share of healthcare expenditures financed by third parties
b.
the prices of healthcare relative to the prices of other goods and services
c.
expenditures on healthcare as a share of the economy
d.
all of the above
16. The growth of third-party payments (payments by insurers and the government) of healthcare services
during the last four decades has been accompanied by
a.
a reduction in expenditures on healthcare as a share of the economy.
b.
an increase in the sensitivity of consumers to the prices of healthcare services.
c.
persistent increases in the prices of healthcare services and rapid growth in the total
expenditures on healthcare.
d.
an increase in the incentive of suppliers to provide healthcare services at a low cost.
17. If a third party pays a larger and larger share of the purchasing price of a good, economic theory
indicates that
a.
the total expenditures (including those made by the third party) on the good will decline.
b.
the demand for the good will decrease.
c.
consumers will have a stronger incentive to economize on their use of the good.
d.
suppliers will have less incentive to provide the good at low prices.
18. As the share of healthcare expenditures paid for by third parties has grown, both healthcare prices and
total expenditures have increased rapidly. Is this surprising?
a.
Yes; third-party payments provide healthcare consumers with a strong incentive to
economize, and therefore, the growth of expenditures is particularly surprising.
b.
No; third-party payments weaken the incentive of healthcare consumers to economize, and
therefore, the rapid growth of expenditures is an expected result.
c.
Yes; the price increases are surprising because healthcare suppliers have a strong incentive
to provide the services at a low price when they are paid for by a third party.
d.
No; the growth of third-party payments will reduce the demand for healthcare, which will
lead to both higher prices and expenditure levels.
19. Economic analysis indicates that the increasing government expenditures and growth of third-party
payments accompanying the Medicare and Medicaid programs
a.
reduced the demand for healthcare services.
b.
reduced the incentive of consumers to economize on their use of healthcare.
c.
increased the incentive of consumers to economize on their use of healthcare.
d.
placed downward pressure on the prices of healthcare services.
20. Economic theory indicates that the growth of subsidies to healthcare consumers and accompanying
expansion in third-party payments will
a.
place downward pressure on the prices of healthcare services.
b.
lead to higher healthcare prices.
c.
increase the incentive of consumers to economize on their purchases of healthcare
services.
d.
increase the incentive of healthcare providers to provide their services at economical
prices.
21. Economic theory indicates that the growth of subsidies to healthcare consumers and accompanying
expansion in third-party payments will
a.
lead to higher healthcare prices.
b.
lead to lower healthcare prices.
c.
reduce the incentive of consumers to economize.
d.
increase the incentive of healthcare providers to provide their services at a low cost.
e.
do both a and c above.
22. When a third party pays a larger and larger share of the purchasing price of a good, economic theory
indicates that the
a.
demand for the good will decline.
b.
consumers of the good will have less and less incentive to economize on its use.
c.
suppliers of the good will have a stronger incentive to provide the good at low prices.
d.
prices of the good will tend to decline with the passage of time.
23. During the 1965-2009 period, the price index of healthcare services
a.
declined slightly relative to the overall consumer price index.
b.
fell by approximately 50 percent compared to the overall consumer price index.
c.
increased at twice the rate of the overall consumer price index.
d.
rose during a brief period following the passage of Medicare and Medicaid but has been
relatively stable since that time.
24. Under the current structure of Medicare, economic theory indicates that the movement of the baby
boom generation into the retirement phase of life during the years following 2011 will
a.
reduce the share of healthcare services paid for by a third party.
b.
push both healthcare prices and expenditures upward.
c.
increase the incentive of suppliers to provide healthcare services at a low cost.
d.
increase the incentive of consumers to economize on their use of healthcare.
25. Under the current structure of Medicare, the movement of the baby boom generation into the
retirement phase of life during the years following 2011 will
a.
reduce the overall demand for medical services because the elderly will not have to pay for
hospitalization in the future.
b.
place downward pressure on healthcare prices.
c.
cause Medicare expenditures to increase and necessitate the need for higher taxes to
finance the program.
d.
do all of the above.
26. Under the current structure of Medicare, the movement of the baby boom generation into the
retirement phase of life during the years following 2011 will
a.
increase the demand for medical services and the share of those services financed by third
parties.
b.
push both healthcare prices and expenditures upward.
c.
cause Medicare expenditures to increase and necessitate the need for higher taxes to
finance the program.
d.
do all of the above.
27. Have market forces failed in keeping healthcare costs under control?
a.
Yes; in most high-income countries healthcare is a socialized industry and costs have been
kept low.
b.
Yes; the government has allowed market forces to determine costs, yet healthcare
spending continues to rise rapidly.
c.
No; government regulations have undermined the operation of markets and created
perverse incentives that have led to rising prices and soaring healthcare expenditures.
d.
No; market forces have been allowed to determine costs and those costs have remained
low relative to the consumer price index.
28. Which of the following contributes to the poor performance of the healthcare industry?
a.
An increasing share of healthcare costs is paid for directly by consumers.
b.
The tax system discourages the purchase of healthcare through employers, while offering
advantages to those who purchase healthcare plans directly.
c.
State regulations often force insurers to cover items such as in-vitro fertilization, drug
rehabilitation, and marriage counseling, which drive up insurance costs.
d.
State regulations make it attractive for health insurers to provide only low-cost,
catastrophic health insurance.
29. Which of the following is true?
a.
More than half of medical bills are paid for directly by consumers.
b.
Healthcare insurance provided by one’s employer is counted as personal income.
c.
State mandated coverage of medical procedures like in-vitro fertilization, drug
rehabilitation, and acupuncture, make health insurance more affordable.
d.
Regulations prevent consumers from purchasing a health insurance plan offered in another
state.
30. The only two options to control the growth of healthcare spending are
a.
price controls and political rationing or competition and market prices.
b.
taxation or political mandates.
c.
subsidizing of healthcare insurance or government provision of healthcare.
d.
free healthcare or subsidized healthcare.
31. Healthcare price controls will lead to
a.
more innovative healthcare treatments.
b.
waiting lines and lengthy delays for treatment.
c.
higher quality healthcare services.
d.
an increase in the supply of healthcare services.
32. If governments provide free healthcare services,
a.
this illustrates that governments can provide healthcare more economically than private
firms.
b.
output and consumption of other goods will not be sacrificed.
c.
resources with alternative uses are allocated to healthcare and there is an opportunity cost
of these resources.
d.
the opportunity cost of the resources used to supply healthcare is zero.
33. When the 2010 Patient Protection and Affordable Care Act is fully implemented, it will
a.
substantially reduce the share of health care expenses paid by a third party.
b.
require all Americans to purchase health care insurance from either a private or
government source.
c.
increase the competitiveness of the health insurance business by allowing people to
purchase the insurance across state boundaries.
d.
reduce the demand for health care and thereby lead to lower prices for health care services.
34. When the 2010 Patient Protection and Affordable Care Act is fully implemented, it will
a.
set the prices (reimbursement rates) for more than 7,000 different medical procedures.
b.
increase the supply of doctors and other medical services.
c.
increase the supply of doctors and other medical services.
d.
reduce the share of health care expenses paid for by a third party, which will increase the
incentive of both consumers and medical providers to economize.
e.
All of the above are true.
35. Which of the following would help control the future growth of healthcare prices and expenditures?
a.
greater reliance on government financed healthcare reimbursement plans
b.
an increase in the share of healthcare expenditures financed with low co-payment
insurance
c.
an increase in the share of healthcare cost paid for either directly or from personal medical
savings accounts
d.
the finance of prescription drugs for the elderly with a low co-payment insurance plan
under Medicare
36. Special savings accounts that individuals would pay into and then use to pay for medical expenses (or
use to purchase a catastrophic health insurance policy) are called
a.
Medicare accounts.
b.
comprehensive insurance plans.
c.
medical savings accounts.
d.
Health Maintenance Organizations (HMOs).
37. From the standpoint of economic efficiency, which of the following is a major advantage of medical
savings accounts?
a.
They encourage healthcare consumers to purchase low-deductible, low co-payment
medical insurance plans.
b.
They guarantee that no American will ever have to pay another medical bill.
c.
They encourage healthcare consumers to economize.
d.
They will force employers to pay a larger share of the medical expenses of their
employees.
38. Which of the following would encourage consumers to economize on their use of healthcare and
producers to provide it more efficiently?
a.
a reduction in out-of-pocket healthcare expenditures
b.
government subsidies that encourage people to purchase health insurance policies with
first-dollar coverage and small co-payments
c.
Medicare reform that at least partially substituted defined benefits (funds that could be
used to pay for healthcare or the purchase of insurance) for the present cost reimbursement
system
d.
all of the above
39. Which of the following would increase the incentive of consumers to economize and of producers to
provide medical services at economical prices?
a.
substitution of catastrophic health insurance plans for low deductible, low co-payment
plans
b.
more reliance on medical savings accounts rather than insurance
c.
equalization of tax treatment between out-of-pocket medical expenses and
employer-provided health insurance
d.
all of the above
40. Which of the following would help to avert a healthcare crisis?
a.
requiring employers to pick up 100 percent of the healthcare costs for their employees
b.
discouraging medical savings accounts since these provide additional funds for medical
care, and therefore, they are likely to drive up medical prices
c.
discouraging the purchase of health insurance plans with small co-payments
d.
structural changes that would increase the competitiveness of the health insurance and
medical services markets
41. Which of the following would increase the incentive of healthcare consumers to economize and help
reduce the future growth of healthcare prices in the United States?
a.
an increase in the share of healthcare costs paid for either directly or from personal
medical savings accounts
b.
subsidies that would encourage consumers to purchase low co-payment insurance plans
c.
a new government program that would cover the cost of prescription drugs purchased by
all healthcare consumers
d.
a reduction in the eligibility age for the coverage of Medicare from 65 to 55 years of age
42. Which of the following would help control the future growth of healthcare prices and expenditures?
a.
an increase in the share of healthcare costs paid for either directly or from personal
medical savings accounts
b.
the substitution of catastrophic (high deductibility) health insurance for low co-payment
plans
c.
more reliance on expansion in the supply of medical services rather than stimulation of
demand
d.
all of the above
43. Which of the following would help control the future costs of healthcare?
a.
a new government program that would cover the cost of prescription drugs purchased by
all healthcare consumers
b.
an increase in the share of healthcare expenditures financed with low co-payment
insurance
c.
allowing consumers to purchase healthcare insurance from out-of-state providers
d.
an increase in the tax benefits of purchasing healthcare through one’s employer
44. In countries such as Canada that have socialized health care, the government operates hospitals, and
health-care services are financed through tax revenue. In these countries,
a.
the government is able to provide as much health care, free of charge, as citizens would
like.
b.
methods other than price, such as political rules and waiting lists, must be utilized to
allocate health-care services.
c.
a large number of services, such as MRIs, that involve expensive equipment are
performed.
d.
citizens are usually so satisfied with their health-care system that they never travel to other
countries to purchase health-care services.
45. In 2007, health-care expenditures were approximately what percent of GDP?
a.
6 percent
b.
16 percent
c.
26 percent
d.
36 percent
46. (I) The Medicare program is financed by general tax revenue and provides low-income families with
access to health care either free or at a low cost.
(II) The Medicaid program covers the bulk of the health-care costs of the elderly and is financed
mostly through a tax on the wages and salaries of current workers.
a.
I is true; II is false.
b.
I is false; II is true.
c.
Both I and II are true.
d.
Both I and II are false.
47. Which of the following is true regarding employer-provided health insurance?
a.
About two-thirds of nonelderly adults have health insurance through group plans offered
by their employers.
b.
Employee compensation in the form of health insurance is not subject to taxation, which
makes it particularly attractive for people to purchase it through their employers rather
than privately, and also to demand policies with small co-payment rates and a low
deductible.
c.
The linking of health insurance to employment reduces employee mobility and creates a
situation where employees lose their health insurance when they lose their job or change
jobs.
d.
All of the above are true.
48. In 2007, third-party payments accounted for approximately what percent of medical-care expenditures
in the United States?
a.
25 percent
b.
46 percent
c.
65 percent
d.
86 percent
49. The growth of third-party payments has resulted in higher prices for health-care services because
a.
the lower out-of-pocket cost for consumers has increased the demand for health-care
services.
b.
consumers have less of an incentive to economize and shop for low-cost services when
they pay a lower share of their bill.
c.
producers have less of an incentive to provide health-care services at a low price when
consumers are not as cost conscious.
d.
All of the above are true.
50. Relative to the general index of consumer prices, medical-care prices have
a.
fallen quite substantially since the beginning of the Medicare and Medicaid programs in
1965.
b.
risen quite substantially since the beginning of the Medicare and Medicaid programs in
1965.
c.
remained roughly constant since the beginning of the Medicare and Medicaid programs in
1965.
d.
fallen, but only slightly, since the beginning of the Medicare and Medicaid programs in
1965.
51. Economic theory suggests that controlling health-care costs through rules and regulations imposed by
the government or another third party is generally
a.
more effective than using competition and the choices of consumers spending their own
money to control costs.
b.
less effective than using competition and the choices of consumers spending their own
money to control costs.
c.
only workable if the entire health-care sector is socialized (operated by the government).
d.
possible to implement successfully because these rules and regulations tend to be in
harmony with the interests of both consumers and health-care providers.
52. The growth rate of the elderly population will accelerate in the future as the baby boomers move into
the retirement phase of life during the years following 2010. Unless structural changes are undertaken,
this increase in the growth rate of the elderly population
a.
will cause future health-care prices and expenditures to increase even more rapidly than in
the past.
b.
will cause future health-care prices and expenditures to decrease rapidly.
c.
will cause the rate of technological advance in medicine to slow significantly.
d.
is generally expected to have no significant impact on the health-care industry.
53. By promoting third-party payment of health-care expenses and the purchase of health insurance
through employers, health-care policy has
a.
eroded the incentive of health-care consumers and providers to economize.
b.
undermined the smooth operation of health-care markets.
c.
made it more costly for persons without a job to obtain health insurance.
d.
done all of the above.
54. Special savings accounts that individuals could pay into directly and then use to pay medical bills or
purchase a catastrophic health insurance plan are known as
a.
flexible benefit accounts.
b.
health savings accounts.
c.
health-care savings bonds.
d.
HMOs.
55. Which of the following reforms could help to improve the operation and efficiency of health-care
markets?
a.
equalizing the tax treatment of out–of-pocket medical expenses and the direct purchase of
health insurance with that of health insurance purchased through an employer
b.
encouraging consumer use of health savings accounts and the direct payment of medical
bills from the accounts
c.
encouraging the purchase of catastrophic health insurance and discouraging the purchase
of policies with first-dollar coverage and small co–payments
d.
All of the reforms listed above could help to improve the situation.
56. Which of the following reforms could help to improve the operation and efficiency of health-care
markets?
a.
shifting Medicare at least partially from a reimbursement service to a defined-benefit plan
b.
placing more emphasis on the demand side of the health-care market
c.
encouraging the purchase of health insurance policies with first-dollar coverage and small
co-payments
d.
All of the reforms listed above could help to improve the situation.
57. “When a third party (for example, an insurance company or the government) pays all or most of the
cost of a good or service, the incentive of consumers to shop for the best value per dollar spent and of
producers to offer the item at an economical price is substantially reduced.” This statement is
a.
essentially true.
b.
false; consumers will still have a strong incentive to search for the most economical price
even if someone else is paying the bill.
c.
false; producers will still have a strong incentive to keep prices low even if consumers are
non-responsive to price differences among suppliers.
d.
false; the party paying for the good will not influence the incentive of either consumers or
producers to economize.
58. If the supply of health-care services is highly inelastic and larger government subsidies lead to an
increase in the demand for the services,
a.
the prices of health-care services will rise by only a small amount, but the quantity
supplied will increase substantially.
b.
the prices of health-care services will rise substantially, but the quantity supplied will
increase by only a small amount.
c.
both health-care prices and the quantity of the services supplied will increase substantially.
d.
the prices of health-care services will decline, but there will be only a small change in the
quantity supplied.
59. As the Medicare program is expanded to cover the cost of prescription drugs for the elderly, other
things constant, this will lead to
a.
an increase in demand and higher prices for prescription drugs.
b.
an increase in demand and lower prices for prescription drugs.
c.
reduction in demand and lower prices for prescription drugs.
d.
reduction in demand and higher prices for prescription drugs.
60. During the last four decades,
a.
the total expenditures of Americans on health care have been relatively constant.
b.
the share of health-care expenditures covered by a third party (either the government or an
insurance company) has increased substantially.
c.
the prices of health-care services have risen but not as rapidly as the general level of
prices.
d.
health-care providers have lowered prices in response to the rapid increase in medical
technology.
61. Federal tax legislation makes it cheaper for individuals and families to pay for health care
a.
by purchasing an insurance policy through their employer rather than paying for it directly
with their own money.
b.
by purchasing an insurance policy through their employer rather than directly purchasing
health insurance from the company of their choice.
c.
directly rather than through an insurance policy offered through their employer.
d.
by both a and b above.
62. Growth in the share of health-care expenditures covered by third parties (for example, insurance or
government programs) will
a.
place downward pressure on the prices of health-care services.
b.
reduce the incentive of suppliers to provide consumers with health-care services at a low
cost.
c.
make consumers more sensitive to the price of health-care services.
d.
make it easier to control the growth of health-care expenditures.
63. During the last three decades, the real (adjusted for inflation) expenditures
a.
on Medicare have grown rapidly, but the real expenditures on Medicaid have been
virtually constant.
b.
on the Medicare program have been virtually constant but the real expenditures on
Medicaid have increased substantially.
c.
on both Medicare and Medicaid have increased substantially.
d.
on both Medicare and Medicaid have been virtually constant.
64. Economic theory indicates that as a larger share of medical services are paid for by a third party (for
example, insurance companies or the government) rather than directly by the consumer,
a.
consumers will have a stronger incentive to economize.
b.
consumers will have a weaker incentive to economize and the prices of medical services
will rise more rapidly than would otherwise be the case.
c.
consumers will have a weaker incentive to economize, but medical service suppliers will
have a stronger incentive to keep prices low.
d.
the suppliers of medical services will have more incentive to economize.
65. Which of the following would encourage consumers to economize on health-care expenditures and
producers to supply health-care services more efficiently?
a.
an increase in out-of-pocket expenditures by health-care consumers
b.
decreased reliance on personal Medical Savings Accounts and health-care expenditures
from the accounts
c.
decreased reliance on the purchase of catastrophic health insurance coverage and less
reliance on insurance with first-dollar coverage and small co-payments
d.
the establishment of a national health-care system that would provide coverage to all
people
66. Which of the following is the best example of a health-care service with a large public good
component?
a.
a hair-growing treatment provided to a twenty-five year-old single man
b.
heart bypass surgery provided to an employee and paid for by employer-funded insurance
c.
a vaccine that reduces the incidence of a communicable disease
d.
a hip replacement provided to a senior citizen
ESSAY
67. If a third party pays for an individual to consume a good, how is the decision making of consumers
affected? How does this affect the actions of suppliers?
68. How has public policy influenced the incentives of consumers to economize and suppliers to provide
their services economically in the health-care industry?