Part A-
True/False-
1) In the presence of insurance coverage, over the counter purchases of drugs like acetaminophen, ibuprofen and naproxen sodium will have a higher elasticity of demand than physician prescribed drugs.
2) Jay's physician prescribes a 15-day supply of a pain relieving medication which costs Jay $15 in co-pay because he has an insurance policy which covers prescription drugs. After 15 days, Jay is still in pain and believes that the medicine alleviates his pain about the same as over the counter ibuprofen. Ibuprofen costs $15 for a 15-day supply, and Jay's price elasticity of demand is about the same for both products. Jay will eventually decide to purchase the ibuprofen over the counter because renewing his prescription involves an additional opportunity cost of the doctor visit.
3) While generics account for more than three quarters of all prescription drugs sales by volume, they account for only 10% of all prescription sales revenues.
4) It was not until after World War II, that it became clear that control over drug safety mechanisms should rest with governmental agencies rather than with an industry watchdog group.
5) The average percentage of revenues spent on R&D by pharmaceutical companies in the U.S. has been stable for the past three decades at about 17%.
6) One of the most widely used estimates of the average cost of developing a new drug has been at about $80 million (in 2000 dollars).
7) Economies of scale are a common feature of R&D in the pharmaceutical industry.
8) Phase I of FDA testing involves human testing for efficacy of an Investigational New Drug (IND).
9) Once a firm has isolated and tested a drug on animals, it files a New Drug Application (NDA) with the FDA. Then, three phases of testing take place over a period of several years.
10) On average, R&D expenses consume a larger share of pharmaceutical funds than marketing and administrative costs.
Multiple Choice-
11) Most studies have shown that the initial stages of the pharmaceutical manufacturing process usually give rise to _________________ , while after the large fixed (sunk) costs are finally paid off, manufacturing of pharmaceutical products exhibits ________________________________.
a) economies of scale; diseconomies of scale.
b) diseconomies of scale; economies of scale.
c) constant returns to scale; diseconomies of scale.
d) economies of scale; constant returns to scale.
e) diseconomies of scale; constant returns to scale.
12) What does the term "detailing" mean in the pharmaceutical industry?
a) An exceptionally thorough cleaning, washing and precise coating process at the final stages of the production of each batch of pills, which will favorably show off all the details of the pill.
b) Detailing involves a representative of the pharmaceutical firm calling on an individual physician to set up a meeting, where the representative will discuss one or two products with the physician.
c) The process of developing a pill design (shape, color, engraving, and other artistic and decorative details).
d) Careful attention to every detail of the drug manufacturing process.
e) The requirement to the drug manufacturers to include the details of the drug side effects in journal and TV advertisements.
13) One act passed by the federal government aimed at reducing the monopoly power of patented drugs was
a) the 2003 Medicare Modernization Act.
b) the 1984 Hatch-Waxman Act which established a process whereby generic drugs could be fast tracked for approval if they could prove they were the bioequivalent of an already approved patented drug.
c) the TRIPS agreement which also provided special provision for AIDs drugs to the poor.
d) the Harris-Kefauver Drug Act Amendments which slowed down the rate at which new drugs were approved by the FDA.
e) the 1997 FDA modernization act which gave pharmaceutical companies ability to provide some information about unapproved uses of drugs.
14) The hierarchy of funds to the pharmaceutical market in order of level of expenditures is
a) wholesalers, mail order and retail pharmacies, pharmacy benefit managers, brand name pharmaceutical companies.
b) mail order and retail pharmacies, wholesalers, pharmacy benefit managers, brand name pharmaceutical companies.
c) brand name pharmaceutical companies, wholesalers, pharmacy benefit managers, mail order and retail pharmacies.
d) brand name pharmaceutical companies, mail order and retail pharmacies, wholesalers, pharmacy benefit managers.
e) brand name pharmaceutical companies, mail order and retail pharmacies, pharmacy benefit managers, wholesalers.
15) Which drug is likely to be the most profitable for its producer (in terms of average "per-drug" profit)?
a) The drug that was introduced in the market 1 year ago.
b) The drug that was introduced in the market 2 years ago.
c) The drug that was introduced in the market 3 years ago.
d) The drug that was introduced in the market 10 years ago.
e) The drug that was introduced in the market 15 years ago.
16) What is the average time period for the introduction of a new drug into market?
a) 2 years
b) 5 years
c) 8 years
d) 9 years
e) 12-15 years
Part B-
True/False-
1) Since no one party owns a not-for-profit hospital, physicians really own the hospital's business.
2) The value of any capital project can be assessed by estimating expected future cash flows from the project and discounting them to the present value. This procedure accounts for the time value of money.
3) Consumer cooperatives have a long and successful history in development of the HMO.
4) For-profit firms make up the bulk of hospital organizations.
5) Kaiser Health Plan is the only HMO in the U.S. to consistently maintain its core competencies. That is, it has kept client satisfaction high, while keeping the growth rate of premiums higher than the growth rate of medical costs.
6) When Allegheny Hospital System (AHERF) went bankrupt, the price of borrowing for all hospitals increased. This is an example of correlated system risk.
7) It could be argued that the federal and state governments provide an implicit guarantee of hospital borrowings because revenue from Medicare and Medicaid patients is assumed to be guaranteed.
8) Venture capitalists are entrepreneurs who specialize in high-risk investments. Often they are the only available source of financing for small startup biotech companies, which very rarely are able to obtain bank loans to finance their research.
9) One of the most important things an HMO should do to stay profitable is to make sure a) the medical costs' rate of growth is below the rate of growth of premiums (revenues), and b) customer satisfaction does not slip.
10) Research studies indicate that when a non-profit healthcare organization is converted to a for-profit status, it might lead to higher prices and a reduction in the number of services offered, if the converting organization had significant monopolistic market power in that geographical area.
Multiple Choice-
11) Agency problems would be least likely to arise
a) in sole proprietorships.
b) in partnerships with less than 3 partners.
c) in partnerships with 3 or more partners.
d) in for profit corporations.
e) in not for profit corporations.
12) Which of the following statements is false?
Not-for-profit hospitals differ from traditional corporations in that
a) a hospital may raise money for a capital building project from charitable social events.
b) a hospital may raise money from charitable organizations to fund every day operating shortfalls.
c) a hospital may have a large endowment from previous benefactors.
d) a hospital is expected to provide a small, but significant portion of its services to patients who are unwilling or unable to pay for them.
e) a hospital is most often subject to systemic (correlated) risks, while a traditional corporation is mostly subject to independent (uncorrelated) risks.
13) Below is the list of the most important risks an investor must evaluate when projecting an HMO's profitability. Which option does not belong to this list?
a) not obtaining enough enrollees
b) setting the capitation rate too high
c) underestimating business expenses
d) overestimating amount of capital and labor needed to run an HMO
e) having too much equity (relative to debt obligations).
14) Which one of the following basic findings about for-profits is not true?
a) For profits tend to respond quicker to any changes in the market situation.
b) For profits have lower costs, higher prices, and consequently greater profits.
c) For profits are often engaged in cream skimming.
d) For profits are often engaged in overcompensated activities like teaching and research.
e) For profits avoid patients who are sicker, poor, or uninsured.