Economics 436 Study Questions for Final Exam Professor Thornton
Health Economics Winter 2012
Definitions
1. Cost-benefit analysis
2. Efficient allocation of resources
3. Net benefits
4. Quality adjusted life year
5. Full price of medical care
6. Hospital residual
7. Price transparency
8. Chargemaster prices
9. Diagnosis related group
10. Multihospital system
11. Volume offset
12. Indirect physician induced demand
13. Capitation method of payment
14. Withhold pool
15. Offshoring drug manufacturing
16. Phase IV clinical trial
17. Contract research organization
18. Bayh-Dole Act
These questions do not require complete sentence answers.
1. List the 3 steps involved in cost-benefit analysis.
2. List 3 approaches to estimating willingness-to-pay for health outcomes.
3. List 5 insights of the Grossman theory of consumer/patient behavior discussed in class.
4. List the 4 most important players in medical markets and the healthcare system.
5. List 3 ways a nonprofit hospital can obtain money to finance new medical equipment.
6. List 3 types of third-party payer, hospital payment systems.
7. List 3 factors that influence physician hours worked.
8. List 4 economic factors that influence physician medical specialty choice.
9. List 3 ways a hospital can be legally organized.
10. List 3 ways a hospital competes for patients.
11. List 3 reasons why hospitals might merge to form a multihospital system.
12. List 3 requirements that a person must satisfy to practice medicine as a physician in the U.S.
13. List 4 conditions under which physician induced demand is likely to occur.
14. List 3 methods of payment for physician services.
15. List 4 functions performed by pharmaceutical companies in the market for medical care services.
16. List the 7 stages involved in developing a new drug.
17. List 3 approaches used by pharmaceutical companies to market a drug.
18. List 3 criticisms of pharmaceutical companies made by critics.
These questions can be answered in 3 to 6 sentences.
1. How does the human capital approach estimate the economic value of additional life years?
2. How does the market data approach estimate the economic value of a life?
3. Many medical professionals do not believe cost-benefit analysis should be used to make healthcare resource allocation decisions. Explain the major objection to cost-benefit analysis?
4. What is the difference between cost-benefit and cost-effectiveness analysis?
5. What is the difference between cost-effectiveness analysis and cost-utility analysis?
6. Economist Christopher Ruhm’s research suggests that economic recessions are good for your health. In the context of the Grossman theory of consumer/patient behavior, provide an explanation for this.
7. In the context of the Grossman theory of consumer/patient behavior, explain why health is both a consumption good and investment good.
8. Economists argue health is a good that yields individuals utility. However, this good cannot be purchased in the marketplace. In the context of the Grossman theory of consumer/patient behavior explain how individuals obtain this good.
9. Joe Smith decides to devote 5 additional hours per week to exercising. In the context of the Grossman theory of consumer/patient behavior, explain how this could result in a decrease in the amount of market goods Joe consumes.
10. You have surgery to treat a knee injury you experienced while participating in sports. In the context of the Grossman theory of consumer/patient behavior explain the direct and indirect effect of this surgery on your utility.
11. Explain how private for-profit hospitals differ from private nonprofit hospitals.
12. Explain how the community theory of hospital behavior differs from the utility-maximizing theory of hospital behavior.
13. Explain the difference between a retrospective payment system and a prospective payment system for hospitals.
14. Explain the economic incentive hospitals have under a retrospective payment system.
15. Some people argue that hospitals charge higher prices to lower income patients and lower prices to high income patients. Do you agree or disagree? Justify your answer.
16. Explain why a community hospital might choose not to have a burn unit even if it provides large benefits to the community the hospital serves.
17. What are the main features of the internal organization of a typical hospital?
18. Explain why hospitals are acquiring physician medical practices.
19. Suppose that third-party payers increase the fees they pay physicians for services provided. Given what we know about physician work-leisure choices, explain how this would influence the number of hours physicians work, and therefore the supply of physicians services.
20. The proportion of medical students who are female is expected to increase in the near future. Explain how this might affect the supply of physician services in the U.S.
21. Health economists argue that there is a misallocation of physicians across geographic locations. Explain the nature of this problem and what economic incentives might be used to correct this problem.
22. Health economists argue that there is a misallocation of physicians across medical specialties. Explain the nature of this problem and how it may affect the quality of care and medical care expenditures.
23. In Econ 202 students learn that the output supply curve for a profit maximizing firm is always positively sloped. Explain why the output supply curve for a physician’s medical practice might be negatively sloped so when the price a physician receives for the services she provides increases she may respond by providing fewer services.
24. Suppose that the number of physicians per capita increases in Southeastern Michigan. Using the principal-agent theory of physician behavior explain how physicians in Southeastern Michigan would respond.
25. Suppose third-party payers decrease the amount they reimburse physicians for services provided. Using the principal-agent theory of physician behavior explain how physicians would respond.
26. An increasing number of physicians are investing in medical facilities such as imaging centers, mammography centers, diagnostic labs, and physical therapy clinics. Explain why this provides an economic incentive for these physicians to engage in indirect physician induced demand.
27. The target income hypothesis has been proposed to explain what limits physician induced demand. Explain this hypothesis.
28. The disutility hypothesis has been proposed to explain what limits physician induced demand. Explain this hypothesis.
29. What is a capitation method of payment for physician services? What economic incentive do physicians have when they are compensated by this method of payment?
30. Explain how a third party payer would use a usual, customary, and reasonable (UCR) fee to reimburse doctors for routine office visits.
31. Explain the idea of a resource based relative value scale to compensate physicians for services provided.
32. Consider a third-party payer that pays cardiologists fee-for-service with a withhold. Explain why the economic incentive for a single physician in the withhold pool not to recommend unnecessary services becomes weaker as the number of physicians in the withhold pool increases.
33. Do you believe a typical doctor has a strong financial incentive to practice defensive medicine? Yes/no. Explain.
34. What is defensive medicine? How is it similar to physician induced demand? How does it differ from physician induced demand?
35. Many health economists argue that defensive medicine is really just “physician induced demand in disguise.” Explain this argument.
36. Explain the financial incentive pharmaceutical companies have to develop a new drug and the risk they take when developing a new drug?
37. Explain how a pharmaceutical company sets the price of a new drug.
38. Do you believe drug advertising increases or decreases social economic welfare? Justify your answer.
39. Drug company critics argue that clinical trials done by drug companies to determine the safety and effectiveness of new drugs may be biased. Explain this argument.
40. Drug company critics argue that a large part of the cost and of new drug development is paid for by taxpayers. Because this reduces the risk of new drug development, pharmaceutical companies are not justified in making large profits. Explain this argument.
These questions have no suggested length; however, try to be concise and substantive.
1. Suppose you are a government policymaker and you must decide how many flu shots to provide for the coming flu season. Would you use cost-effectiveness analysis or cost-benefit analysis to help you make this decision? Justify your answer.
2. You must determine which of the following two types of medical care services is the most cost- effective way to treat coronary artery heart disease for a 60 year old patient: 1) drug therapy, 2) angioplasty. The marginal cost of providing drug therapy and angioplasty is $15,000 and $20,000, respectively. The survival probabilities (P) and quality of life weights (w) for this patient for no treatment, drug therapy, and angioplasty are given in the following table.
Survival Probabilities Quality of Life Weights
Age No Treatment Drug Therapy Angioplasty No Treatment Drug Therapy Angioplasty
61 0.7 0.9 0.7 0.5 0.8 0.7
62 0.5 0.7 0.7 0.4 0.6 0.7
63 0.5 0.5 0.6 0.1 0.5 0.6
64 0 0.4 0.6 0 0.5 0.5
65 0 0 0.4 0 0 0.3
66 0 0 0 0 0 0
Use cost-effectiveness analysis to calculate the marginal benefit and cost-effectiveness ratio for drug
therapy and angioplasty. Interpret your measure of marginal benefit and the cost-effectiveness ratio.
Which treatment is most cost-effective? Why? Now use cost-utility analysis to calculate the marginal
benefit and cost-utility ratio for drug therapy and angioplasty. Interpret your measure of
marginal benefit and the cost-utility ratio. Which treatment is most cost-effective? Why? Do both of
these analyses result in the same conclusion? If not, explain why not. Which method of analysis would
you choose do determine the cost-effectiveness of the alternative treatments? Defend your choice.
3. Studies suggest that 30% to 40% of age 60 women choose not to have annual mammograms? In the context of the Grossman model of consumer/patient behavior, explain why this might be a rational choice for some women.
4. In class, we discussed four alternative theories of hospital behavior. Which theory do you believe best explains why hospitals behave the way they do? Explain this theory and justify your choice.
5. Discuss how hospitals compete for patients, and how hospital competition affects hospital prices, efficiency, and quality of care?
6. What are physician-owned specialty hospitals. Discuss the arguments for and against these hospitals.
7. The Affordable Care Act of 2010 is expected to provide health insurance coverage to an additional 32 million Americans. However, for people to have adequate access to medical care there must be an adequate total supply of physician services; an adequate supply of physician services to inner city and rural locations; and an adequate supply of primary-care services. Given what you know about factors that influence the supply of physician services, discuss various policy actions the government could possibly take to increase the total supply of physician services, the supply of physician services to inner city and rural locations, and the supply of primary-care services.
8. Do you believe the principal-agent theory of physician behavior provides a reasonable explanation of how a typical physician behaves? Yes/no. Justify your answer.
9. From 1990 to 2008, the physician population ratio in the U.S. increased from 220 to 258 physicians per 100,000 population. Use the principal agent theory of physician behavior to explain the effect this may have had on price, utilization, and spending on medical care services. You may want to draw a graph to assist you in your explanation.
10. What is defensive medicine? How does defensive medicine differ from physician induced demand? Do you believe a typical doctor practices defensive medicine? Yes/no. Explain.
11. What is a fee-for-service with a withhold method of payment for physician services? Do you believe it provides an adequate incentive for physicians not to provide unnecessary medical care services? Explain.
12. You are a third party payer. You want physicians to practice cost-effective medicine. Explain how you would compensate them for services provided?
13. Explain (don’t simply list) the stages involved in developing a new drug.
14. For a drug to be sold in the U.S. it must be safe and effective. Explain in what sense and to what degree drugs are safe and effective.
15. Discuss the 3 approaches that pharmaceutical companies use to market their drugs. Do you believe these marketing practices increase or decrease social economic welfare? Yes/no. Carefully explain.
16. Suppose that the patent on a drug expires. Carefully explain why this may result in a “segmented market” for the drug. Also explain how the drug will likely be priced in this segmented market.
17. Discuss the major criticisms of pharmaceutical companies made by their critics. Do you believe that any of these criticisms are not valid? Explain.