Student Number: YORK UNIVERSITY ATKINSON ECONOMICS AK/ECON 3510 3.

0 SECTION M HEALTH ECONOMICS SAMPLE FINAL EXAM INSTRUCTOR: Professor N. Buckley Mon. Apr. 18th 2011 3 HOURS (7:00 10:00 PM) LOCATION: SLH A

NAME: ___________________________ LAST NAME STUDENT NUMBER:

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SIGNATURE: INSTRUCTIONS:

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Make sure to print your NAME, STUDENT NUMBER and SIGN the sheet above. Write your student number at the top right of each page. You can use pen or pencil Basic scientific calculators are allowed, although you should not need one. You have 3 hours to answer all questions (a total of 110 marks). Questions will be either multiple choice, true/false/why or short answer format. For multiple choice answers, no work needs to be shown. The full marks will be granted if the best answer is circled and zero otherwise. For true/false/why questions, grading will emphasize your explanation. For true/false/why and short answer questions make sure to show all your work, part marks will be granted. It is a good idea to state the meaning of any technical terms you use in your answer. Be concise and clear, the allotted space is adequate to provide a good answer. In all cases your answers should emphasize and discuss the questions from an economic perspective using concepts discussed in the lectures and notes. Your answers should reflect what a thoughtful health economist would say about these issues. Although not required, feel free to draw diagrams to help answer questions (in which case be clear what you are graphing)

Student Number: 1. [2 marks] QALYs are a means of quantifying the benefits of a medical intervention that takes both the quantity and quality of life lived into account. QALYs are used in which type of economic evaluation? a) b) c) d) Cost-Benefit Analysis Cost-Effectiveness Analysis Cost-Minimization Analysis None of the above

2. [2 marks] A regression is run between health status and education. It is found that the variable of number of years of schooling has a p-value of 0.99. We can conclude: a) b) c) d) People in the sample have a higher probability of going to school The average person in the sample has approximately 0.99 years of schooling That the number of years of schooling is significantly correlated to health status That the number of years of schooling is not significantly correlated to health status

3. [2 marks] Moving to a new area with less industrial pollution will likely cause what change in terms of your total product of health care on health: a) b) c) d) Shift your total product curve downward Shift your total product curve upward Cause you to move down along your total product curve Cause you to move up along your total product curve

4. [2 marks] The demand for hospital care is generally: a. More elastic than demand for primary care b. Less elastic than demand for primary care c. Of equal elasticity to the demand for primary care d. Bears no regular relationship to the demand for primary care

5. [2 marks] Because of informational asymmetries in health care insurance markets: a. individuals wish to pool their risks. b. individual choices can lead to moral hazard c. health care is not demanded in and for itself. d. the choices of individuals can generate adverse selection.

Student Number: 6. [2 marks] Which of the following finance schemes implies vertical inequity in financing health care? a. Progressive financing schemes b. Proportional financing schemes c. Regressive financing schemes d. None of the above implies vertical inequity 7. [2 marks] Using a scheme that pays physicians using a blend of capitation and fee-forservice rather than a purely capitation-based scheme may help reduce: a. the excess burden associated with insurance premiums b. risk selection by physicians c. moral hazard by physicians d. external effects in the health sector e. the regressiveness of our system of health care financing 8. Fee-for-service payment is more likely to be efficient in settings for which: a. The funder is paying physicians responsible for managing a set of complex, chronic conditions that require a wide range of services b. The funder wants to encourage a specific set of services that are thought to be underutilized c. The funder is most interested in limiting its financial risk d. The funder believes that supply-side moral hazard is a serious problem 9. Which of the following statements is NOT consistent with the evidence on efficiency and quality of care in for-profit versus not-for-profit hospitals in the U.S.: a) for-profit hospitals generate more revenue because they are more efficient b) there is a trend toward lower quality in for-profit hospitals c) for-profit hospitals generate more revenue through pricing strategies d) prospective reimbursement lower costs and lower quality in both types of hospitals 10. According to the McGuire and Pauly model of physician behaviour, increasing the wage paid to physicians will cause their labour supply curve a) to be upward sloping since supply curves are always upward sloping b) to be upward sloping because the substitution effect and income effect of a wage increase will always cause the physician to work more hours c) to be downward sloping because the income effect due to the increased wage will cause the physician to demand for leisure since it is a normal good d) to be either upward sloping or downward sloping depending on whether the substitution effect or the income effect dominates the physicians preferences/utility function

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11. [6 marks] The criterion of portability under the Canada Health Act refers to the fact that the provincial health insurance plan must cover non-residents who are visiting the province. True False Why?

False. The criterion of portability refers to the fact that the provincial health insurance plan must cover provincial residents, even when they are out-of-province. There is no principle that non-residents should be covered by a provincial health insurance plan.

12. [6 marks] An efficiently cost-effective allocation of productive resources must also be technologically efficient. True False Why?

True. The definition of a cost-effective allocation is one that achieves the lowest-cost technically efficient allocation with no wasted resources. All cost-effective allocations are required to be technically efficient and on the PPF to be relevant otherwise one could lower costs by moving to a irrelevant technologicall inefficient point inside the PPF.

Student Number: 13. [6 marks] A new cough medicine appears on the market with the same properties and effectiveness as the existing cough medicine only the new medicine is offered at a lower price. We would expect the demand curve for the existing medicine to shift to the left because the two goods involved are complements. True False Why?

False. It is true that we would expect the demand for the existing medicine to shift left because some people would change from purchasing the existing medicine to purchasing the new cough medicine. This would cause demand to be lower for the existing medicine. However this shift to the left is caused because the two medicines are substitutes (they provide the same service/use to consumers) not because they are complements (they are not consumed together).

14. [6 marks] Richer people can afford more of all goods yet according to the Grossman model they will chose a higher health stock. T F Why?

True. You can look at this in two ways (two acceptable answers). First, looking at Grossmans PPF model, if you become richer then your PPF shifts to the right (you can afford more consumption goods at each level of health). If your indifference curves are the usual shape because you have preferences for health as a consumption good as well as an investment good, then the new chosen point will contain more health and consumption goods (if a person only views health as an investment good then this statement will be false). Secondly, if you look at Grossmans MEI model, richer people have higher MEI curves since they have a higher wages and hence a higher return from healthy days. Since a higher MEI curve lies above and to the right of the original MEI curve, the new chosen point where r+=MEI is to the right of the old one and implies a health stock increase.

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15. [6 marks] If a doctor is a perfect agent for her patients, she will always provide care that is expected to improve a patient's health. T F Why?

False. A perfect agent does whatever the patient would prefer if the patient had the same information as the provider. Optimal health care consumption depends both on the effectiveness of health care and patient preferences for health. A provider that always delivers care that is effective (i.e., expected to improve health) ignores patient preferences for health, and therefore would not be a perfect agent.

16. [6 marks] If we define a health care service as needed if the expected health effect for a person is positive, then society should ensure that all health care needs are met. T F Why?

False. If we define a needed care as all care for which the marginal health benefit is positive, then this includes services for which the marginal cost of providing the care is greater than the marginal benefit (i.e., the health benefit is positive but small). The condition for the efficient level of consumption (which maximizes net benefit) is that marginal cost equal marginal benefit. Hence, it would be inefficient (i.e., non-optimal) to meet all health care needs as the marginal cost exceeds marginal benefit for some health care needs.

Student Number: 17. [6 marks] Risk aversion is a necessary condition for insurance to be welfare improving to an individual. True False Why? True. A person can have three attitudes toward risk. If they are risk loving, they get benefit from facing risky situations; if they are risk neutral, they are indifferent about facing risk; and if they are risk averse, their welfare suffers when they face a risky situation. The purpose of insurance is to reduce or eliminate risk. Hence, as it is only risk averse individuals who suffer a loss in welfare from facing a risky situation, risk aversion is a necessary condition for insurance to be welfare improving (i.e., reducing or eliminating risk improves welfare).

18. [6 marks] Health care finance systems in which insurance is mandatory and insurance coverage is standardized across policies and insurance organizations is most likely described as a market-led regulatory approach. True False Why? False. Market-led regulatory approaches seek to use private health insurance markets due to the efficiency of market competition and dynamics. Forcing everyone to buy insurance that is standard across all companies without letting them choose their own coverage and payments system goes against the competitive forces supported by market-led approaches. These characteristics are more in tune with non-market regulator approaches that emphasize collectivity and cooperation among organization over competition.

Student Number: 19. [6 marks] Fee-for-service provides no incentive to be efficient. T F Why?

False. Under fee-for-service, a provider has a clear incentive to produce a service in a technically efficient and cost-effective way as the difference between the fee and the cost is net revenue for the provider (or, if they are not income maximizers, it allows them to treat more patients with a given allocation of resources). Hence, even under fee-for-service they have incentive to be efficient in these ways. It is on this basis that the answer is false. It is true that under fee-for-service, if a provider cares about income there can be an incentive to provide an inefficient level of services, and specifically to provide more than the efficient level of services.

20. [6 marks] The is no substitute for a physician in producing health care services. T F Why?

False. There are many things that can substitute for a physician in the production of health services (and health). For example, there is considerable evidence that nursepractitioners can provide with equal quality a wide variety of services commonly provided by physicians; similarly, midwives can provide pregnancy-related services commonly provided by family physicians.

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21. [6 marks] Discuss the possession of risk between funder and providers for Diagnosisbased payment and fee-for-service payment schemes. Diagnosis-based payment pays a provider a fixed amount for each case treated in each diagnostic category, while fee-for-service pays a fixed amount for each type of service provided. Hence, a larger proportion of the diagnosis-based payment is prospectively determined. Because the amount of risk transferred from the funder to a provider varies directly with the amount of prospectivity in the payment mechanism, diagnosis-based payment transfers more risk from the funder to the provider than does fee-for-service.

22. [6 marks] What is the key difference between for-profit and not-for-profit organizations? Not-for-profit and for-profit organizations can both legally accumulate surpluses. The key difference between for-profit and not-for-profit organizations is that for-profit organizations are legally permitted to distribute the surplus to the owners of the organization, while notfor-profit organizations are not allowed to distribute the surplus in this way (it must be kept within the organization).

Student Number: 23. [9 marks] Discuss fee-for-service, diagnosis/case-based and capitation funding/payment schemes covered in class focusing on whether they have incentives to over-provide or under-provide care. Fee for service: The provider or organization is given a fixed amount of money for each unit of a service that they provide. It creates incentive for providers to produce services in the leastcost way (since the difference between the fee and their costs determines their income/profit). It biases providers toward inefficient overprovision of reimbursable services and underprovision of services not listed in the fee schedule. Diagnosis/Case-based: The provider or organization receives a fixed sum of money each time they treat an case of a particular diagnosis (ex. treat a case of appendicitis). It also creates incentive to undertreat patients, to select only the less severe cases within a diagnostic category, and to strategically classify diagnoses so as to maximize payments. Capitation: The organization/provider receives a fixed sum of money per period for each individual (enrolled) under its care. It creates incentive to underprovide care (called skimping) and to engage in risk selection to attract relatively low-risk, healthy individuals within each risk class

24. [9 marks] Discuss whether the College of Physicians and Surgeons' limitations on advertising by physicians reduces social welfare by reduces the degree of competition in the health care market. The market for physician services is characterized by a high degree of informational asymmetry, whereby the provider has a considerable informational advantage over patients. The prohibition of advertising is part of a set of regulations designed to shield physicians from the kind of competition we often try to foster in other markets (allowing them to function more effectively as agents for their patients) and to protect uninformed consumers from unscrupulous providers. Such regulation does give physicians market power, which can reduce social welfare (e.g, resulting in higher prices). Hence, the net benefit from such regulation depends on two counteracting effects: (1) the increase in welfare arising from addressing the problems that arise from informational asymmetries; (2) the decrease is welfare that arises from granting physicians market power. The policies were designed to ensure that on net, (1) outweighs (2), but we cannot be certain that this is the case.

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