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What is Production Possibilities Curve (PPC)?

- Illustrates production and allocative efficiency - An economic model that depicts the various combinations of any two goods or services that can be produced efficiently given: • Stock of resources • Technology • Various institutional arrangements

What are the four factors that distinguish medical services from other goods?

-Intangibility: A medical service is incapable of being assessed by the five senses -Inseparability: Production and consumption of a medical service take place simultaneously Patient often acts as both producer and consumer -Inventory: Directly related to inseparability Health care providers are unable to stockpile or maintain an inventory of medical services -Inconsistency: Composition and quality of medical services consumed vary widely across medical events

What are the factors that determine the short run health production?

-Profile Individual's mental, social & physical profile Includes uncontrollable factors—age, race and gender -TECH State of medical technology -Environment Air and water quality and public health measures -SES Effect of social and economic factors Education, income and poverty -Lifestyle Set of health-related choices (diet, exercise) -Medical care Quantity and quality of medical care consumed

What are the four basic questions studied by health economics?

1. What mix of nonmedical and medical goods and services should be produced in the macroeconomy? 2. What mix of medical goods and services should be produced in the health economy? 3. What specific health care resources should be used to produce the chosen medical goods and services? 4. Who should receive the medical goods and services that are produced?

QALYs place a higher value on ________ because rich and poor people are evaluated ______. A. equity; similarly. B. efficiency;similarly. C. efficiency;differently. D. equity; differently

A. equity; similarly.

Cost-Utility Analysis

Considers number of life-years saved Quality of life Adjusts the number of life-years gained by some type of index that reflects health status, or quality of life Rating scales Quality-adjusted life-years (QALYs) Life expectancy ˣ Health-utility index Health-utility index = Measure of the quality of remaining life-years Scale: 1 to 0 1 = one year of full health 0 = death Critics Accuracy of survey techniques Discrimination Does not tell us whether the overall well-being of society is increased Just whether one medical treatment or technology is more cost effective than another

What is coinsurance plan?

Consumer pays some fixed percentage of the cost of health The insurance carrier picks up the other portion Lowers the out‐of‐pocket price of health care

In your own words describe the difference between cost-benefit and cost effectiveness analysis.

Cost-benefit analysis measures the total social costs and benefits attributable to a given medical intervention. Cost effectiveness analysis measures the total cost of achieving a specified health care objective, such as a life-year saved.

The social optimum in cost-benefit analysis occurs when: A. total benefits have been maximized. B. total benefits have been minimized. C. total costs equal total benefits. D. marginal costs equal marginal benefits.

D. marginal costs equal marginal benefits.

Production Possibilities Curve is an economic model that depicts the various combinations of any two goods or services that can be produced efficiently given the stock of resources, _____, and various institutional arrangements. A. consumer tastes B. market prices C. predicted scarcity of shortage of resources D. technology

D. technology

What are the major components of total cost identified in cost benefit analysis?

Direct medical care costs Direct nonmedical costs Indirect costs

All points along the production possibilities frontier maximize equity.

False

Among developed countries, the U.S. has the lowest infant mortality rate.

False

Better macroeconomic conditions have a positive overall impact on health.

False

Cost-effectiveness analysis is useful in deciding if public funds should be spent on military personnel or public health initiatives.

False

Economists assume people behave rationally. If this were true, then the U.S. Surgeon General would only make decisions that benefit him/her financially.

False

Opportunity costs only occur when there is government involvement in markets such as health care.

False

Process quality refers to the physical and human resources of the medical care organization.

False

Rationality implies that people will always make the correct choice.

False

The reduction in the number of reported polio cases was due largely to government health programs.

False

There is a constant relationship between increases in health and utility.

False

What is co‐payment?

Fixed amount paid by the consumer Independent of the market price or actual costs of medical care Does not automatically change with an adjustment in costs of providing medical care

In your own words, use utility analysis to explain why people demand health. How does the law of diminishing marginal utility fit into the analysis?

Health is a durable good that is desired for consumption and investment purposes and people demand health because it generates utility or satisfaction. From a consumption perspective, an individual desires to remain healthy because he or she receives utility from an overall improvement in the quality of life. The investment element is concerned with the relation between health and time. A healthy person allocates less time to sickness and therefore has more healthy days available in the future to work and to enhance income or to pursue other activities. The law of diminishing marginal utility states that each successive incremental improvement of health generates smaller and smaller additions to total utility. Thus, utility increases a decreasing rate with respect to health

Willingness-to-Pay Approach

How much money people are willing to pay for small reductions in the probability of dying Deciding whether to purchase a potentially life-saving medical service Benefit = Reduced probability of dying, π, times the value of the person's life, V Purchase if benefit just compensates for the cost, C π × V = C π × V = C V = C / π Value of the human life lower-bound estimate Advantage Measures the total value of life and not just the job market value

What are "Intensive margin" and "extensive margin" for market demand of medical care?

Intensive margin: How much more or less of a product consumers buy when its price changes Extensive margin: How many more or fewer people buy a product when its price changes

What is a health production function?

Maximum amount of health that an individual can generate: From a specific set of health-related inputs In a given period of time

Describe the factors that make it difficult to measure output in medical care markets

Medical care poses numerous measurement problems because it is a service rather than a tangible product in most instances. As a service, medical care exhibits the four characteristics that distinguish it from a good: intangibility, inseparability, inventory, and inconsistency.

What are the two primary public health insurance programs in the US? What are the target populations for them respectively?

Medicare and Medicaid. Medicare is Uniform, national public health insurance program for aged and disabled individuals. Medicaid provides coverage for certain economically disadvantaged groups

What is moral hazard?

Moral hazard is a situation in which consumers alter their behavior when provided with health insurance.

What are the two main types of third‐party payers in a health care system?

Private health insurance company and government

What is QALY?

Quality-adjusted life-years (QALYs) -Life expectancy ˣ Health-utility index

What is the DRG system?

The Diagnosis-Related Group (DRG) system is a prospective payment method instituted by the federal government to compensate hospitals for inpatient services provided to Medicare patients.

What is deductible?

The consumer must pay out of pocket a fixed amount of health care costs per calendar year before coverage begins

As of March 1, 1994, children riding bicycles in New York must wear safety helmets. Assuming that the decision to enact this law was based on cost-benefit analysis, what types of costs and benefits do you think were included in the study?

The costs include the cost of advertising and enforcing the new helmet law plus the cost of purchasing bicycle helmets. The benefits include the medical care avoided because of fewer head injuries from bicycle accidents. Long-run benefits are made up of the discounted value of production loss avoided because of fewer head injuries and deaths. Also included is the discounted value of the utility resulting from some individuals living longer and healthier lives.

Identify the four basic kinds of health care systems discussed in the chapter and briefly describe their basic features.

The four basic kinds of health care systems mentioned in the text include: national health insurance (Canada), socialized health insurance (Germany), public contracting (United Kingdom), and a pluralistic system (United States).

What are two major uses of medical funds?

The two major uses of medical funds are hospital services (31 percent) and physician services (21 percent).

Advancements in medical technology allow people to obtain greater amounts of health with the same amount of medical care.

True

Physicians are a scarce resource in health care markets.

True

Since 1975, the uninsurance rate in the U.S. has increased.

True

The use of a larger discount rate will result in a lower present value when estimating the costs and benefits of new medical technology.

True

Human Capital Approach

Used to determine the monetary worth of a life Value of a life = the market value of the output produced by an individual during his or her expected lifetime Involves estimating the discounted value of future earnings resulting from an improvement in or an extension of life Shortcomings Unable to control for labor market imperfections Gender, racial, other forms of discrimination Doesn't take into account Value of any pain and suffering averted because of a medical treatment Value an individual receives from the pleasure of life itself

What is opportunity cost?

Value of the next best alternative that is given up

What are the three major components of total cost in health economics?

a. Direct medical care costs b. Direct nonmedical costs c. Indirect costs

A variable payment reimbursement system with low out-of-pocket expenses carries a _______ of large amounts of medical services. a. High likelihood b. Moderate likelihood c. Low likelihood d. Very low likelihood e. None of the above.

a. High likelihood

Which of the following is not a characteristic of medical care that distinguishes it from other goods? a. Investment b. Inventory c. Intangibility d. Inconsistency e. Inseparability

a. Investment

Which of the following best describes productive efficiency? a. Producing a medical service at the lowest possible cost. b. Constructing a new medical facility to exactly offset a market shortage of such services. c. Increasing the amount of hospital beds available such that each person in the population served has a bed allocated to him/her. d. None of the above. e. More than one of the above statements is true.

a. Producing a medical service at the lowest possible cost.

______ are typically the primary source of funding for medical care insurance provided by a government agency. a. Taxes b. Premiums c. Copayments d. Out-of-pocket fees e. None of the above.

a. Taxes

The use of a larger discount rate will result in a lower present value when estimating the costs and benefits of new medical technology. a. True b. False

a. True

Which of the following is not a basic question that must be answered as a result of scarcity? a. Who should decide the amount of money spent on medical goods and services? b. Who should receive the medical goods and services that are produced? c. What mix of nonmedical and medical goods and services should be produced in the macroeconomy? d. What specific health care resources should be used to produce the chosen medical goods and services? e. What mix of medical goods and services should be produced in the health economy?

a. Who should decide the amount of money spent on medical goods and services?

Failure to achieve the maximum total net societal benefit (TNSB) results in some amount of _______. a. deadweight loss b. negative TNSB c. increasing opportunity costs d. unnecessary direct costs e. diminishing marginal productivity

a. deadweight

Cost-effectiveness analysis assumes that _______. a. the outcome is desirable b. the marginal benefit is greater than the marginal cost c. resources are unlimited d. there are no indirect costs e. new technology is preferable to old technology

a. the outcome is desirable

Which of the following best describes allocative efficiency? a. Producing a medical service at the lowest possible cost. b. Constructing a new medical facility to exactly offset a market shortage of such services. c. Increasing the amount of hospital beds available such that each person in the population served has a bed allocated to him/her. d. None of the above. e. More than one of the above statements is true.

b. Constructing a new medical facility to exactly offset a market shortage of such services.

All points along the production possibilities frontier maximize equity. a. True b. False

b. False

Among developed countries, the U.S. has the lowest infant mortality rate. a. True b. False

b. False

Opportunity costs only occur when there is government involvement in markets such as health care. a. True b. False

b. False

Any point _______ the production possibilities frontier is efficient and attainable. a. inside of b. along c. outside of d. both a and b are correct e. both a and c are correct

b. along

Consumer demand for medical care is considered a _______ demand, as it depends on the consumer's demand for good health. a. absolute b. derived c. relative d. supplemental e. supply-side

b. derived

Money spent on transportation to a medical care provider is an example of _______. a. direct medical care costs b. direct nonmedical costs c. indirect costs d. deadweight loss e. None of the above.

b. direct nonmedical costs

Money spent on transportation to a medical care provider is an example of _______. a. direct medical care costs b. direct nonmedical costs c. indirect costs d. deadweightloss e. None of the above.

b. direct nonmedical costs

The _______ states that an individual's income relative to some social group average impacts health. a. absolute income hypothesis b. relative income hypothesis c. relative position hypothesis d. income inequality hypothesis e. absolute position hypothesis

b. relative income hypothesis

Germany's health care system can be best described as _______. a. national health insurance b. socialized health insurance c. managed competition d. public contracting e. pluralistic

b. socialized health insurance

Which of the following best illustrates the law of diminishing marginal utility? a. A physician orders additional exams to provide a more accurate diagnosis. b. A person chooses the most comprehensive health insurance offered every time, regardless of the benefit or cost. c. A patient chooses to visit the dentist twice a year for checkups rather than once a month. d. Congress chooses to continue debating the merits of alternative health policies. e. None of the above.

c. A patient chooses to visit the dentist twice a year for checkups rather than once a month.

_______ can help avoid the problem of diminishing marginal productivity of medical care. a. Increases in the number of physicians b. Increases in the number of nurses c. Advancements in medical technology d. both a and b are correct e. All of the above

c. Advancements in medical technology

_______ has been credited as the leading cause of decreases in child mortality during the early twentieth century in the U.S. a. The polio vaccine b. Improvements in public education c. Improvements in water quality d. Medicaid e. The improving macroeconomy

c. Improvements in water quality

Which of the following is considered a shortcoming of the human capital approach? a. It includes nonmarket returns b. It is used to estimate the value of a human life c. It includes labor market imperfections d. All of the above e. None of the above

c. It includes labor market imperfections

The concept of _______ helps explain why some people choose not to visit their primary care physician every day. a. inseparability b. human capital c. diminishing marginal utility d. process quality e. absolute income hypothesis

c. diminishing marginal utility

Lost wages due to a medical disability is an example of _______. a. direct medical care costs b. direct nonmedical costs c. indirect costs d. deadweight loss e. None of the above.

c. indirect costs

Lost wages due to a medical disability is an example of _______. a. direct medical care costs b. direct nonmedical costs c. indirect costs d. deadweightloss e. None of the above.

c. indirect costs

Using the incremental cost-effectiveness ratio, if a new medical technology represents a positive net cost and negative net effect, then _______. a. the new medical technology dominates the old medical technology b. the relative costs and benefits must be reviewed further c. the old medical technology dominates the new medical technology d. the discount rate utilized should be changed e. a standard gamble should be utilized

c. the old medical technology dominates the new medical technology

Which of the following accounts for the greatest number of deaths in the U.S.? a. Chronic lower respiratory diseases b. Alzheimer's disease c. Diabetes mellitus d. Diseases of the heart e. Malignant neoplasms

d. Diseases of the heart

The U.S. market system is best described as a _______. a. Perfect egalitarian system. b. Pure market system. c. Dictatorship. d. Mixed distribution system. e. More than one of the above statements is true.

d. Mixed distribution system.

_______ is the largest source of health care funds in the U.S. a. Out-of-pocket b. Medicaid c. Medicare d. Private health insurance e. Workers' compensation

d. Private health insurance

Insurance _______ the price for medical care, thereby _______ the demand for it. a. increases; decreases b. decreases; decreases c. increases; increases d. decreases; increases e. None of the above

d. decreases; increases

Which of the following is not a method used in constructing a health-utility index? a. rating scale b. standard gamble c. time trade-off d. discounting e. both b and d

d. discounting

Discounting involves _______ by (1 + r)t to obtain the _______ . a. dividing the present value; willingness to pay b. multiplying the future value; present value c. multiplying the present value; willingness to pay d. dividing the future value; present value e. dividing the future value; willingness to pay

d. dividing the future value; present value

The _______ equates the value of a life to the market value of the output produced by an individual during his / her expected lifetime. a. willingness-to-pay approach b. cost-benefit approach c. cost-effectiveness approach d. human capital approach e. cost-utility approac

d. human capital approach

*The _______ states that distribution of income directly impacts health. a. absolute income hypothesis b. relative income hypothesis c. relative position hypothesis d. income inequality hypothesis e. absolute position hypothesis

d. income inequality hypothesis

The _______ states that distribution of income directly impacts health. a. absolute income hypothesis b. relative income hypothesis c. relative position hypothesis d. income inequality hypothesis e. absolute position hypothesis

d. income inequality hypothesis

Which of the following is included in the health production function? a. Age b. State of medical technology c. Gender d. Income e. All of the above

e. Age, State of medical technology, Gender, Income (All of the above)

Which of the following is a limitation of cost-benefit analysis? a. Difficulty choosing the correct discount rate b. Difficulty measuring the value of a human life c. Difficulty measuring the dollar value of gains / losses in utility d. Both a and c are correct e. All of the above

e. All of the above

Which of the following is included in the health production function? a. Age b. State of medical technology c. Gender d. Income e. All of the above

e. All of the above

_______ help explain the law of increasing opportunity costs. a. Differing consumer preferences b. The characteristics of a pure market system c. Advancements in technology d. Imperfect substitutability of resources e. Decreases in the availability of natural resources

e. Decreases in the availability of natural resources

Which of the following is a limitation of cost-benefit analysis? a. Difficulty choosing the correct discount rate b. Difficulty measuring the value of a human life c. Difficulty measuring the dollar value of gains / losses in utility d. Both a and c are correct e. All of the above

e. Difficulty choosing the correct discount rate, Difficulty measuring the value of a human life, Difficulty measuring the dollar value of gains / losses in utility (All of the above)

Which of the following represents an opportunity cost? a. Increases in medical technology. b. Reduction in fees for Medicare patients. c. Additional spending on public health initiatives. d. Increased enrollments at medical schools. e. Forgone geriatric care to provide additional maternity services.

e. Forgone geriatric care to provide additional maternity services.

Which of the following accounts for the greatest amount of health care spending? a. Public health b. Physician services c. Prescription drugs d. Nursing home care e. Hospital services

e. Hospital services

_______ occurs when more patients are treated by a new medical intervention. a. Income inequality b. Treatment substitution c. Social influence d. Environmental impact e. Treatment expansion

e. Treatment expansion

*The components of the three-legged stool of medical care are _______. a. costs, access, efficiency b. costs, equity, access c. access, equity, efficiency d. efficiency, costs, quality e. costs, access, quality

e. costs, access, quality

The components of the three-legged stool of medical care are _______. a. costs, access, efficiency b. costs, equity, access c. access, equity, efficiency d. efficiency, costs, quality e. costs, access, quality

e. costs, access, quality

What are the typical inputs to health production function?

medical care, technology, profile, lifestyle, socieconomic status, environment

What are the three main categories of health care resources?

• Medical supplies - Pharmaceutical goods, latex rubber gloves, bed linens • Personnel - Physicians, lab assistants • Capital inputs - Nursing home and hospital facilities - Diagnostic and therapeutic equipment - Other items that provide medical care services