Health Economics
14th Edition
ISBN: 9781137029966
Author: Jay Bhattacharya
Publisher: SPRINGER NATURE CUSTOMER SERVICE
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Chapter 7, Problem 15EQ
To determine
Explain the standard model and real world insurance markets work.
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Health insurance is normally seen as a good that is most valuable to sick people, since health expenditures are highest for the sick. Yet, in the basic insurance model discussed in this chapter, actuarially-fair health insurance is worth nothing to people who are certain to become sick (p = 1). Why does the standard model produce this result? How is this different from the way real-world insurance markets work?
You have been recruited as an expert in health economics to recommend
what is the best therapy for a group of patients. In the image below you will
find the decision tree showing the probabilities for different health states
and outcomes for patients undergoing two possible treatments, No drug
therapy and Drug therapy. Based on the expected cost, which therapy
would you recommend as the least expensive? Explain how you arrived at
your recommendation and show your calculations the space provided.
No drug theraphy ?
Drug theraphy
?
HEALTH STATES
PROBABILITIES
Remain in Good Health
0.5
Develop disease A
0.2
Develop disease B
0.2
Die
0.1
Remain in Good Health
0.53
Develop disease A
0.16
Develop disease B
0.22
Die
0.09
OUTCOMES
(Costs)
$0
$400
$300
$200
SO
$800
$500
$0
Even though the total cost of an uninsured hospital stay is lower, why would an uninsured person actually end up paying more than those with insurance?
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- Health Care Demand An individual's demand for physician office visits in a given year is given by, Q = 11-0.045P, where Q is the number of office visits and P is the out-of-pocket price paid by the individual for each visit. Assume the market price of an office visit is $180. Use this information to answer the questions below. Questions: 1. Without insurance, how many office visits will the individual make in one year? NOTE: Enter a formula to calculate the number of visits, rounding your answer to the nearest whole number. 2. Suppose the individual has insurance and pays only a $40 copayment for each visit. How many office visits will the individual make in one year? NOTE: Again, enter a formula, rounding your answer to the nearest whole number. 3. What is the moral hazard and deadweight loss (DWL) associated with having insurance? NOTE: Enter formulas in the respective boxes below. Moral Hazard: DWL: 4. Based on the Nyman model, suppose the value the individual places on each visit…arrow_forwardWhich statement about health insurance in the US is false? Question options: 1) Going back to 1940, only about 10 percent of the US population had any health insurance 2) The share of the under-65 population with private health insurance rose until the 1970s and then plateaued—it remained virtually constant until the implementation of the Affordable Care Act 3) Early on, the health insurance market was dominated by Blue Cross plans, which practiced community rating in setting premiums 4) Measured in percentage points, the drop in the uninsured rate in the nonelderly population between 2013 and 2016 was larger than the increase in the share with private insurancearrow_forwardFor a person who previously had no insurance and received an insurance plan paying for 80 percent of all types of medical care, what increase in use would you expect for hospital care, dental care, and physician services, on average?arrow_forward
- Suppose that there are two countries, Beta and Gamma. Suppose further that everyone in country Beta is on Insurance B and everyone in country Gamma is on Insurance G. Suppose further that both governments use government-set price controls. In 2005, country Beta decided to change the reimbursement rate for pharmaceuticals, but country Gamma did not make this change. You, a researcher, want to study the effect of offering coverage for this drug had an impact on health expenditures. You have average health expenditures for State Beta and Gamma prior to 2005 and post-2005. Using the information in the table below, a quick difference-in-difference calculation suggests covering this drug ____ health expenditures by approximately ____. State Time Periods Pre-2005 Post-2005 State Beta $1000 $1400 State Gamma $1500 $1700 a. decreased; $400 b. increased; $200 c. increased; $400 d. decreased; $200arrow_forwardSuppose that there are two countries, Beta and Gamma. Suppose further that everyone in country Beta is on Insurance B and everyone in country Gamma is on Insurance G. Suppose further that both governments use government-set price controls. In 2005, country Beta decided to change the reimbursement rate for pharmaceuticals, but country Gamma did not make this change. You, a researcher, want to study the effect of offering coverage for this drug had an impact on health expenditures. You have average health expenditures for State Beta and Gamma prior to 2005 and post-2005. Using your finding from the question above, you can infer that country Beta likely _____ reimbursement rates for pharmaceutical drugs. State Time Periods Pre-2005 Post-2005 State Beta $1000 $1400 State Gamma $1500 $1700 a. lower b. did not change c. raisedarrow_forwardSuppose that there are two countries, Beta and Gamma. Suppose further that everyone in country Beta is on Insurance B and everyone in country Gamma is on Insurance G. Suppose further that both governments use government-set price controls. In 2005, country Beta decided to change the reimbursement rate for pharmaceuticals, but country Gamma did not make this change. You, a researcher. want to study the effect of offering coverage for this drug had an impact on health expenditures. You have average health expenditures for State Beta and Gamma prior to 2005 and post-2005. Using the information in the table below, a quick difference-in-difference calculation suggests covering this drug health expenditures by approximately. Time Periods Pre-2005 Post-2005 $1000 $1400 $1500 $1700 State State Beta State Gamma decreased: $400 increased; $200 decreased: $200 increased; $400arrow_forward
- Suppose consumers consume and gain utility from two types of goods and services – (1) health care and (2) all other goods & services. Using this information, derive the demand curve for health care.arrow_forwardMoral hazard creates tradeoffs that complicate insurance design and policy choices. Imagine a linear demand curve for outpatient clinician visits, and assume at $100 per visit there would be 50,000 annual visits to a particular urban clinic. A politician would like to be popular, and proposes making clinic visits free (zero price). You know, as the city's staff health economist, that if this were to happen, the number of visits would rise to 75,000. Your job is to testify before the city council, and answer at least two questions: how much social welfare loss from moral hazard would occur; and how much tax money must be raised to finance clinic services if visits were made completely free? a. $2,500,000; $15,000,000 b. $5,000,000; $30,000,000 c. $1,250,000; $7,500,000 d. $3,750,000; $22,500,000arrow_forwardEconomics Use the following information to determine the costs to you and/or to the insurance company for the following occurrences:1) You have $500 per person Wellness Benefit.2) You have a $500 İndividual Deductible and your family (spouse and children) has a $500 Family Deductible.3) You have a $10,000 annual Maximum Family Out-of- Pocket expense provision.4) Once you have met your Individual or Family Deductible, your insurance will pay 80% of the expenses and you will pay 20% as your co-pay.Unless the occurrence is a Wellness expense, you and/or your family have to meet their deductibles first before insurance will pay anything. Example:Assume that you have met your deductible, and you go to the Emergency Room for a large cut on your shin which required cleaning, 20 stitches, a tetanus shot, and antibiotics. (80/20 plan)Total Charges = $2,500 totalYour Responsibility = $2,500*.20 = $500 (goes toward your Max Out of Pocket)Insurance Responsibility = $2,500*.80 = $2,000 Question:…arrow_forward
- Find evidence that can explain how the difference in educational attainment influences the health of people who reside in that country. Here, you are identifying a determinant of health and at least one risk factor. Summarize what you found and justify the determinant of health and risk factor. (cite in text citation) 4 sentences or more.arrow_forwardThe following question asks about what happens to employment (Q), wages (W), and total compensation (T) when firms begin offering health insurance benefits. Without health insurance benefits, the labor supply curve in terms of wages is given by W 6 + Q, and the labor demand curve in terms of wages is W = 10 - Qp. Q here is hours of work. W is wages in dollars per hour. Assume that workers value the health benefits at $5 per hour. Assume the benefits cost the firm $4 per hour to provide. 1. When firms begin offering health insurance benefits, which of the following is true about the new demand curve? In this exercise, demand curve is still defined as function of wages (rather than as a function of total compensation). The demand curve will shift up by $4 The demand curve will shift down by $4 O The demand curve will shift up by $5 O The demand curve will shift down by $5arrow_forward1. An individual has a health insurance plan with a deductible of $1200 and a coinsurance rate of 50%. Their demand curve is Q=20-(P/10), and the equilibrium market price of medical care is $100 per unit. What quantity of medical care would the individual choose to consume? 2. Suppose that consumers are all risk neutral and so they do not purchase health insurance. The equilibrium price of a doctor visit is $30, the supply of doctor visits is perfectly elastic, and the aggregate demand for doctor visits is given by Q=200-5*P. Calculate the effect that universal perfect health insurance (that is, coinsurance rate=0) would have on social welfare, measured as the sum of consumer surplus plus producer surplus. 3. Consider a version of the Akerlof model in which neither buyers nor sellers observe car quality (though somehow – please suspend your disbelief – both buyers and sellers enjoy higher utility from higher quality cars). For this question, please assume that both buyers…arrow_forward
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