For each question, please highlight the correct answer in bold and type a justification for selecting that answer in the space provided below.

1.John has a 40% chance of becoming ill and having to pay $10,000 for medical care, and a 60% chance of being healthy and not having to pay anything for medical care. He is just indifferent between taking this risk and paying a $5,000 premium for health insurance that will give him exactly $10,000 for health care when he is sick. Based on this we can say that:

a)John risk averse

b)John is risk neutral

c)John is a risk lover

d)There is not enough information to say.

e)This problem has nothing to do with risk aversion.

Explain Your Answer:

2.Using the above example, John is given another option for the structure of his health insurance plan. He can choose between the plan above, or choose a high deductible plan with a deductible of $2000, and a premium of $3000. He still has a 60% chance of being healthy (assume he will have no medical expenses in this case). If he becomes ill, his plan will provide exactly $8,000, and he will contribute $2,000 from the deductible.

Leaving aside other factors, which of the two plans is most advantageous financially?

Explain Your Answer:

3.Which of the following is NOT a good reason why health care markets differ from other important markets that economists study?

a)Health care demand is highly uncertain

b)Health care prices are opaque

c)Health care has experienced dramatic technological change

d)Health care is paid for indirectly through insurance

e)Health care markets are especially vulnerable to moral hazard, behavioral hazard, and adverse selection

Explain Your Answer:

4.Which of the following statements is FALSE as a description of how co-insurance affects demand and consumption by consumers?

a)As the co-insurance rate drops, the demand curve becomes more inelastic

b)As the co-insurance rate drops, consumption increases

c)Co-insurance allows consumers to know the actual cost of the intervention

d)The lower the co-insurance rate, the greater the financial risk for consumers

Explain Your Answer:

5.Medicare enrollees can purchase prescription drug coverage through the Medicare Part D program. Prior to passage of the Affordable Care Act, the general coinsurance structure of Medicare Part D was as follows (the specific dollar amounts shown are for 2009):

a)There was an initial $295 out of pocket deductible before insurance began to pay anything.

b)Between $295 and $2700 in total costs, the coinsurance rate was 25%.

c)After $2700 in total costs, coinsurance rates increased to 100%,

d)Once out of pocket costs reached $4350, the coinsurance rate fell to 5%.

Explain Your Answer:

Use the above specifics of the Medicare Part D prescription drug plan and graph a senior's out of pocket expenses for prescription drugs (vertical axis) versus the total expenditures on prescription drugs (horizontal axis). Limit the x-axis to $5000.

6.Which of the following situations is NOT a (potential) example of adverse selection for individuals choosing a health insurance plan? Assume the insurance company is unaware of any of these factors.

a)An individual who has lost 25 pounds over 6 months because of abdominal pain and poor appetite

b)An individual who has smoked for 30 years, but stopped 3 months ago and has a negative nicotine screening test.

c)A woman with a genetic predisposition to breast cancer

d)An individual who has just changed jobs and must select a new health insurance plan

e)None of the above

Explain Your Answer:

7.Considering each of the following pairs, in which of the two is moral hazard more likely (responses benefit from some medical knowledge so don't fret if you are unsure). Note: For each of the 5 choices (a-e), pick the alternative from the two choices given that is most likely to result in moral hazard. For example, choose between "Hospital admission" and "visit to physician office" in a).

a)Hospital admission vs. visit to physician office

b)Visit to physician's office for mild upper respiratory infection vs. visit for hemoptysis (coughing up blood)

c)Screening whole body CT scan in an otherwise healthy individual looking for any abnormality vs. abdominal CT scan for abdominal pain, nausea and fever

d)CT scan for recent onset low back pain vs. CT scan for headache and blurred vision of 1 month duration

e)Prescription of antibiotic for mild upper respiratory infection vs. prescription for documented bacterial pneumonia

Explain Your Answer:

8.Considering each of the following pairs, in which of the two is negative behavioral hazard more likely (assume out of pocket cost is equivalent between the two choices). Assume the consumer is making the decision in all cases. Responses benefit from some medical knowledge so don't fret if you are unsure. Note: For each of the 5 choices (a-e), pick the alternative from the two choices given that is most likely to result in behavioral hazard. For example, choose between "Seeking prescription medication for intractable pain" and "Seeking prescription medication for high cholesterol" in a).

a)Seeking prescription medication for intractable pain vs. for high cholesterol

b)Scheduling physician visit for abdominal pain and weight loss vs. for hypertension (high blood pressure)

c)Scheduling screening mammogram vs. mammogram for palpable breast mass

d)For a chronic smoker, scheduling screening chest x-ray vs. chest x-ray for hemoptysis (coughing up blood)

e)For diabetic, scheduling routine physician visit vs. for infected foot ulcer

Explain Your Answer:

9.Applying the Time-trade-off (TTO) method (discussed in week 1) to determine QALY weights:

Joan has severe rheumatoid arthritis, associated with decreased mobility and substantial pain. When asked how many years in perfect health would be equivalent to living 10 years in her current condition she says 5. Given a QALY weight (q in the QALY equation) for perfect health of 1 and for death of 0, what would be her QALY weight? While the methodology for this calculation was not described, use your intuition.

Explain Your Answer:

10.Applying the standard gamble (discussed in week 1) to determine QALY weights.

Bill has severe congestive heart failure which makes him nearly home bound given his decreased exercise capacity. He is asked to consider a gamble between staying at his current level of disability vs. an intervention with probabilities of either being cured or dying (for example a heart transplant). He is presented with various probabilities until he is indifferent between his current level of disability and a specific probability of cure. Suppose he is willing to accept a 30% chance of cure (and an associated 70% chance of death). Given a QALY weight for perfect health of 1 and for death of 0, what would be his QALY weight? While the methodology for this calculation was not described, use your intuition.

Explain Your Answer: