The setting of each of these questions is the nation of Freedonia, which includes Asclepius Hospital (one of many local hospitals), and the BBNW Insurance Company—which sends most of its patients to Asclepius for care. Please focus your answers on material covered through Module 5. Use economic terms as appropriate. Do not include arguments that are extraneous to course content.
1. Doctors at Asclepius have invented a novel cure for the extremely rare, very serious, acute, and completely unforeseeable condition of Economists. They would like to sell it at a very high price. Explain to BBNW why they should include coverage of Economists in their insurance packages.
2. Freedonia has passed a law that permits but does not require, insurers to include maternity benefits in their insurance packages. What are the likely effects of this law on the insurance market? What are the implications for Asclepius?
3. The government of Freedonia has decided to implement a system of risk adjustment based on diagnosis codes in its health insurance system. How is the introduction of this process likely to affect the practices of BBNW and of Asclepius and the well-being of people in Freedonia?
4. Health insurance is becoming very expensive in Freedonia, and BBNW wants to raise coinsurance and deductibles to combat this. How are these changes likely to affect Asclepius? What evidence can you present that supports your argument? MHA-GP 1853: Introduction to Health Economics Midterm Exam Study Sheet
5. Freedonia contains some community hospitals and an academic medical center, staffed by the most experienced physicians. All the hospitals are operating at near capacity. The table below shows 30-day mortality outcomes (the fractions of patients who die) for otherwise identical patients seen at the two types of hospitals.
Academic Center High-risk patient 30%
Low-risk patient 5%
Community hospital 32%
Fredonia is trying to decide where to send high-risk and low-risk patients. It is also considering funding a training program that will improve outcomes for high-risk patients but can be conducted at only one of the hospitals. Where should it deploy its resources? Be sure to use economic terms and reasoning to make your argument.
•Demand and Supply, Opportunity Cost, Marginal Benefit/Cost
•Comparative and Absolute Advantage
•Maximizing behavior, indifference curves, budget constraint, market equilibrium, stable preferences
•Demand for and value of insurance
•Single product – pooling equilibrium
•Selection in a single product market
•Selection in a multi-product market (purple dot policies)
•Selection on insurance product components – mandates
•Responses to adverse selection
•Moral Hazard (asymmetric information)
•Complete contingent claims framework •Welfare Effects of Moral Hazard
•RAND experiment and estimates
•Oregon lottery and estimates
•Response to moral hazard – i.e. coinsurance/deductibles •Value-based Health Insurance
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