Part 1: Required Question
1. Unfortunately for you, you have been elected President of the United States on a write in ballot. Your first priority is health care reform. Describe the policy changes would you would like to make. You must justify each policy suggestion with economic arguments. Be sure to consider unintended consequences and actions you might take to limit those consequences or avoid them. In answering this question, you are to ignore political feasibility and assume that you would be able to implement your ideas. You will be graded primarily on the validity and feasibility of your arguments rather than the actual policy choices you make.
Part 2:
2. Graphically illustrate the profit maximization and utility maximization models and discuss any fundamental difference between the two. Also, identify the major factors that could potentially enter into a manager's utility function.
3. Short run and long run cost curves tend to have U shapes, but for different reasons. Explain why the short run average cost (SRAC) has the U shape and why the long run average cost curve (LRAC) has a U shape. Utilize specific examples from the health care industry to reinforce your theoretical explanation.
4. Physicians that are licensed Medicare providers have been able to practice price discrimination among their patients. Explain a) what type (degree) of price discrimination they would be practicing and b) how this discrimination benefits or hurts society.
5. Given the following graph:
A) Indicate the equilibrium price and quantity to be charged.
B) Calculate the profit or loss for this firm.
C) Indicate what type of medical care market this graph might represent (more than one possibility exists. JUSTIFY your answer.
D) Explain whether this firm is efficiently allocating resources from society's perspective. If not, explain where the social efficient allocation point would occur. If so, wipe your brow, be thankful for an easy answer for a change, and move on.
6. Answer both of the following questions.
a. Explain how competition manifests itself among hospitals in the not-for-profit sector.
b. Explain how relevant markets are typically defined for community hospitals.
7. Answer both of the following questions.
a. Suppose there is a new drug in the pipeline that will reduce AIDS mortality from .25 to .015, but the drug will not be approved by the FDA for 6 years. If 24,000 citizens are afflicted each year, what is the number of statistical deaths that could have been avoided with earlier FDA approval?
b. If the demand for Viagra is P = 800 - 20Q in the United States and P = 300 -25Q in Canada, at what price would Viagra sell at in each country? Assume marginal cost is equal to $45. Explain what would happen if reimportation became legal for all interested parties.
8. a. Explain how Certificates of Need (CON) may be anticompetitive.
b. What are the determinants of a geographic market?
c. What are the advantages of using the Herfindahl-Hirschman Index versus a concentration ratio?
9. Answer both of the following questions.
a. Describe how prospective payment using DRGs is intended to change the incentive structure for hospitals.
b. Describe how RBRVS is intended to work. How will the change in relative prices across services and procedures affect resource allocation in medical care?
10. One factor that enters the specialty choice of new medical school graduates is the income potential of the specialties. If these incomes are not determined in a competitive labor market, then it is possible that the number entering a given specialty will not meet efficient level. The current system, dominated by Medicare and large insurance companies, is not competitive. Some claim that lack of competition in the market is responsible for shortages in some specialties.
a. What are the conditions for a competitive market for specific medical specialties? Are these conditions met in our health care system?
b. What factors influence the demand for medical services? Is it possible for patients to demand more physicians than government or private payers desire?
c. Is there a shortage of primary care physicians? How do economists answer this question? How can we address this issue?
11. Read the following short article synopsis and answer the associated questions.
Tiered Copayments for Medicaid
In an effort to slow increases in Medicaid expenditures, a federal commission in September of 2005 recommended allowing states to increase copayments on some expensive drugs, particularly in cases where cheaper alternatives are available. The theory is that higher copayments on the expensive drugs will steer patients to less expensive alternatives, saving Medicaid an estimated $2 billion over five years. There is concern that the very sick and minorities in the Medicaid program would suffer most under the proposed changes. Other proposals were aimed at ensuring that the government does not pay too much for prescription drugs for Medicaid patients and allowing states to negotiate discounted payments for prescription drugs. The commission also wanted to tighten financial eligibility requirements, allowing states to consider a greater portion of a person's assets when determining eligibility. Nationally, the Medicaid program serves 53 million people and costs states and the federal government about $329 billion a year. The commission hoped its recommendations would reduce Medicaid spending by $11 billion.
Source: "Panel Favors Higher Co-Payments for Certain Drugs in Medicaid," The Wall Street Journal, September 2, 2005.
Questions for Discussion
a. Critics argue that some Medicaid patients do not have the option to shift to "cheaper alternatives," and will therefore be forced to shoulder the financial burden caused by higher copayments. Is it realistic to assume that some patients will not be able to switch to a different drug?
b. Are there meaningful differences between name-brand drugs and generics? What about between name-brand drug A and name-brand drug B, both of the same drug class and designed to treat the same ailments?
c. Comment on whether you feel this is a good policy from an economic perspective. What are the trade-offs associated with using price incentives in a low-income population?
12. Read the following short article synopsis and answer the associated questions.
Pharmaceuticals and Technology Assessment
In September 2005 the Food and Drug Administration approved Remicade, a drug previously approved for treating diseases such as rheumatoid arthritis and Crohn's Disease, for the treatment of ulcerative colitis. The hope is that the drug will save people from having to undergo surgery and possibly allow people to discontinue the use of other drugs that can have dangerous side effects. Ulcerative colitis is a lower digestive system disorder characterized by abdominal pain, bloody diarrhea, fatigue, weight loss, loss of body fluids and nutrients; about one third of those with the disease end up having their colon surgically removed. As of September 2005, no other drug comparable to Remicade existed for treating the ulcerative colitis. Patients taking Remicade were found more likely to go into clinical remission and to stop taking other drugs all together. Side effects of Remicade can include various infections, with tuberculosis being a rare side effect. The cost for a full-year treatment of Remicade ranges from $15,000 to $17,000, but Medicare and private insurance usually cover the drug.
Source: Daniel Rosenberg, "Remicade May Prevent Surgery for Ulcerative Colitis Patients," The Wall Street Journal, September 26, 2005.
Questions for Discussion
a. Remicade has the potential to reduce the use of surgery to treat ulcerative colitis. But the cost for a full-year treatment of Remicade is $15,000 to $17,000. Discuss how you might approach a cost effectiveness or cost-benefit analysis of Remicade versus surgical interventions.
b. Why do pharmaceutical companies often market and promote products, even with FDA approval, beyond their originally intended purpose? What incentives are at play?
c. Should clinical practice guidelines be used to distinguish between candidates for Remicade versus surgery? Why or why not?
13. Select the best answer for each of the following MC questions.
i. What is the most significant cost of attending medical school?
a. Tuition and fees.
b. Books and incidentals.
c. The income foregone.
d. Room and board.
e. Pain and suffering.
ii. The rate of return on an investment in medical education
a. is inversely related to the length of time spent in formal schooling.
b. is inversely related to income.
c. will increase with an increase in the availability of student loans.
d. is much higher than the rate of return on an undergraduate business degree.
e. is inversely related to the number of years in the profession.
iii. Physicians who own their own diagnostic testing facilities tend to order more tests, charge higher fees for them, and have higher total bills to patients. This practice of self-referral is an example of
a. moral hazard.
b. adverse selection.
c. res ipsaloquitor.
d. physician-induced demand.
e. cognitive dissonance.
iv. The observed variations in practice patterns in different regions of the country are difficult to eliminate
a. because of the many alternative treatment options available for most ailments.
b. due to the localized nature of most medical practice.
c. because it is difficult to change the preferences of physicians and patients.
d. the observed variations are so minor that they are of little concern to policy makers.
e. responses a, b, and c are all true.
v. Suppose the number of medical school graduates continues to increase over the next decade. Which of the following is true?
a. Physicians' salaries must fall.
b. Physicians' salaries must rise.
c. Physicians' salaries will fall only if the demand for medical services falls.
d. Physicians' salaries will fall if the demand for medical services rises more than the supply of physicians rises.
e. Physicians' salaries will rise if the demand for medical services rises more than the supply of physicians rises.
vi. Over the past thirty years, the absolute number of physicians has _______ while the physician-to-population ratio has _______.
a. decreased; decreased
b. decreased; increased
c. increased; remained stable
d. increased; increased
e. increased; decreased
vii. Which of the following payment mechanisms provides the greatest incentive to over utilize medical care?
a. Fee-for-service
b. Fixed Salary
c. Capitation
d. Pay-for-performance
e. Price controls
viii. Which of the following exemplifies the principal-agent theory within medical care?
a. The doctor-patient relationship
b. The doctor-payer relationship
c. The patient-payer relationship
d. Both a and c
e. All of the above
14. Select the best answer for each of the following MC questions.
i. The predominate organizational form for U.S. hospitals is not-for-profit. Why?
a. The profit motive corrupts human behavior.
b. For-profit hospitals do not provide charity care.
c. Private not-for-profit hospitals engage in most of the medical research.
d. The not-for-profit form provides the most benefits to physicians.
e. All of the above.
ii. The dominant factor affecting medical care delivery and finance in the 1990s was
a. the Hill-Burton Act.
b. prospective payment for hospitals.
c. creation of Medicare and Medicaid.
d. the explosive growth of managed care.
e. ERISA.
iii. Assume that there are 5 equally sized hospitals in a market area. If two of these hospitals decide to merge, what will be the increase in the Herfindahl-Hirschman index?
a. 2,000
b. 800
c. 1600
d. 2800
e. 400
iv. According to the _______, new technology is most likely to be adopted by research and teaching hospitals first.
a. quantity maximization model
b. quality maximization model
c. managerial expense preference model
d. quality/quantity maximization model
e. utility maximization model
v. Which of the following best explains why there is little evidence of cost differences between hospital ownership-types?
a. Certificates of need
b. Consolidations
c. Increasing hospital occupancy rates
d. Physicians seeking to maximize their incomes
e. All of the above
vi. The dominant factor affecting medical care delivery and finance in the 1960s was
a. the Hill-Burton Act.
b. prospective payment for hospitals.
c. the creation of Medicare and Medicaid.
d. the explosive growth of managed care.
e. the passage of ERISA.
vii. Using the physician-control model to explain hospital behavior leads to which of the following conclusions?
a. Other medical inputs tend to be over used to maximize physicians' productivity.
b. The use of operating rooms will be maximized with little excess capacity.
c. Physicians will strive to utilize the nursing staff efficiently.
d. All investment decisions will be based on optimal resource use.
e. All of the above are conclusions of the physician-control model.
viii. This study was the catalyst for the early 20th century reform of medical education in the United States. What was it?
a. Coolidge Commission
b. Hill-Burton Committee
c. Mangrum Report
d. Flexner Report
15. Select the best answer for each of the following MC questions.
i. Which of the following accounts for the largest share of expenditures on prescription drugs?
a. Private insurance
b. Medicare
c. Medicaid
d. Medigap
e. Out-of-pocket
ii._______ advertising is supported by evidence showing that _______ detailed advertising of older products tends to be targeted at younger physicians.
a. Informative; more
b. Persuasive; less
c. Informative; less
d. Persuasive; more
e. both a and d
iii. Which of the following serves as a barrier to entry in the pharmaceutical industry?
a. Government patents
b. Certificates of need
c. Brand-loyalty advantage
d. Both a and c
e. All of the above
iv. Which of the following methods has been used by third-party payers to control pharmaceutical costs?
a. Formularies
b. Drug utilization review
c. Generic substitution
d. Both b and c
e. All of the above
v. Rent-seeking behavior results in
a. increased economic activity by promoting efficiency.
b. lower economic activity by diverting resource to less-productive uses.
c. a more equitable distribution of income and wealth.
d. lower prices throughout the economy.
e. greater income and wealth in the private sector.
vi. The fastest-growing segment of pharmaceutical marketing is:
a. marketing to physicians.
b. marketing to nurse practitioners.
c. marketing to the consumer.
d. none of these.
vii. The FDA tends to focus more on reducing _______ errors since the victims are more identifiable than those from _______ errors.
a. type 1; type 2
b. type 2; type 1
c. type 2; type 1
d. type 1; type 2
e. None of the above
viii. Which of the following would explain why large firms possess a greater incentive to engage in research and development of new drugs than small firms do?
a. Resource capability
b. Risk absorption
c. Research economies
d. All of the above
e. None of the above