Econ 5.3
The situation described here (of healthy people not subsidizing sick people through the purchase of insurance) is a problem for a system of health insurance since it
1) Accentuates the adverse selection problem for insures 2) may impose big losses on insurers 3) make insurance premiums excessively high
Given the following statement: "Providing health care is obviously a public good. If one person becomes ill and doesn't receive treatment, that person may infect many other people. If many people become ill, then the output of the economy will be negatively affected. Therefore, providing health care is a public good that should be supplied by the government." Health care, as a good, is best described by:
1) Health care should be supplied by the govt because it generates positive externalities & 2) health care should not be supplied by the government because the private market preserves incentives to improve health care with innovation and medical technology.
An Externality
1) interferes with the economic efficiency of a market equilibrium 2) refers to a benefit or cost of an economic activity that affects someone who is not directly associated with it 3) may require government intervention (ANSWER: ALL of the ABOVE)
Health insurance companies deal with asymmetric information problems by
1) requiring applicants to submit medical records 2) requiring policy holders to pay a deductible 3) limiting the coverage of pre-existing conditions. (Answer:All of the Above)
An article in the Economist magazine argues that the real problem with health insurance is as follows: The healthy people who decide not to buy insurance out of rational self-interest, and who turn out to be right. By not buying insurance, those (largely young) healthy people will be failing to subsidize the people insurance is meant for: the ones who end up getting sick. Source: "To Boldly Go Where He Had Already Been Before," Economist, May 13, 2011. Why is it rational for healthy people not to buy health insurance?
1) they anticipate having small or negligible medical bills 2) they receive little risk of becoming sick 3)they anticipate little benefit from purchasing health insurance (ANSWER: All of the ABOVE)
While teaching the concepts of asymmetric information, a professor asked his students for examples of adverse selection or moral hazard in marriage. Which of the following examples most accurately describes adverse selection and moral hazard in marriage?
Adverse selection because the husband's secret alcoholism comes out after the wedding. Moral hazard because a spouse lets their appearance go after marriage.
Briefly explain whether you agree with the following statement: "The reluctance of healthy young adults to buy medical insurance creates a moral hazard problem for insurancecompanies."
Disagree. Moral hazard becomes a problem after one purchases insurance. In this case, the reluctance ofyoung, healthy adults to purchase insurance in the first place leads to an adverse selection problem.
Which of the following refers to the principal-agent problem in the market for health care?
Doctors pursuing their own interest rather than the interests of their patients
Under the Social Security retirement system, the federal government collects a tax on most people's wage income and makes payments to retired workers above a certain age who are covered by the system. (The age to receive full Social Security retirement benefits varies with the year the worker was born.) What attributes of the Social Security retirement system make it a program of social insurance?
It provides a means of spreading the risk of bad outcomes & it is a transfer program
Do you agree that health insurance is meant for people who end up getting sick?
No. While it obviously directly benefits those who do become sick, it indirectly benefits all since everyone faces some risk of sickness. There is a "psychic" benefit to knowing that one is "covered" if sickness should befall them.
Which of the following are examples of activities that generate externalities in the market for health care?
People receiving vaccinations against infectious disease & Individuals engaging in injurious or reckless lifestyle choices
Match the terms below on the left with the definitions to their right. Do this by inserting into each term's response box the number associated with its correct definition.
Principal-agent problem:Results from agents pursuing their own interests rather than the interests of the principals who hired them. Adverse selection: Is the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction. Asymmetric information: Occurs when one party to an economic transaction has less information than the other party. Moral hazard: Refers to actions people take after they have entered into a transaction that make the other party to the transaction worse off.
Suppose you see a 2017 Honda Civic hatchback advertised in the campus newspaper for $9,000. If you knew the car was reliable, you would be willing to pay $11,500 for it. If you knew the car was unreliable, you would be willing to pay $6,500 for it. You should buy the car if which of the following circumstances is true?
There is a 50-50 chance that it is a lemon
The marginal social benefit from vaccinations is greater than the marginal private benefit to people being vaccinated.
True
An article in the New York Times observed, "American doctors often rail against the country's medical malpracticesystem, which they say forces them to order unnecessary tests and procedures to protect themselves if a patient suesthem." Source: Margot Sanger-Katz, "A Fear of Lawsuits Really Does Seem to Result in Extra Medical Tests," New York Times, July 23, 2018. Is there another economic explanation—apart from fear of lawsuits—for why doctors may end up ordering unnecessary tests and other medical procedures
Yes, since doctor themselves largely conduct the tests and preform the procedures, they benefit by enhancing the revenue of their practices
An article in the Wall Street Journal refers to "the basic principle of insurance—pooling risk in order to minimize liability from unforeseen dangers." Source: Amanda Foreman, "Insuring against Disaster," Wall Street Journal, February 20, 2019. The problem of_____ moral hazardadverse selectionperfect information is that it undermines the ability of insurance to provide the benefit of sharing risk.
adverse selection
Which of the following terms refers to the situation in which one party to an economic transaction takes advantage of knowing more than the other party to the transaction?
adverse selection
The "lemons problem" refers to the observation that the presence of asymmetric information in the used car market leads to the problem of _________ causing the cars offered for sale to be predominantly ______ in quality.
adverse selection, poor
In the market for health insurance, asymmetric information problems arise because...
buyers of health insurance policies always know more about the state of their health than do the insurance companies.
Hospitals and doctors sometimes perform tests that may not be of any value to patients because
health care providers are paid for each service they render.
Which of the following is an example of a way in which health insurance companies have dealt with the problem of adverse selection?
limiting insurance coverage on pre-existing conditions
Which of the following terms refers to the problem in which one person with no deductible on his or her health insurance policy tends to engage in a less healthy lifestyle than another person with a high insurance deductible?
moral hazard
Because public goods must be both ______ and _____ health care _______ qualify as a public good under the usual definition.
nontrivial, non excludable, does not
Which of the following terms refers to what occurs when a person gets a vaccination against a disease and that action reduces the chances that other people will contract that disease?
positive externality
In an opinion column in the Washington Post, Daniel Morgan of the University of Maryland's School of Medicine described the result of a study he carried out with colleagues: "We found that nearly 90 percent of the patients received at least one unnecessary [medical] test and that, overall, nearly one-third of all the tests were superfluous." Source: Daniel Morgan, "What the Tests Don't Show," Washington Post, October 5, 2018. Are there features of the U.S. health care system that might be encouraging this behavior? The article is referring to the
prevalence of patient health insurance in the United States that results in the principal-agent problem.
An article in the Los Angeles Times describes a healthy 23-year old woman who has decided not to buy health insurance as "exactly the type of person insurance plans that states and the federal government are counting on to make health reform work." Source: Anna Gorman, "Affordable Care Act's Challenge: Getting Young Adults Enrolled," Los Angeles Times, June 2, 2013. Young healthy people must be forced to participate in health reform because they are needed to
provide a subsidy to older sicker people
n the case of health insurance, a lemons problem exists since those more likely to want health insurance are ______ people.
sick
