Question 1

How can an insurance company reduce the moral hazard problem?

Accepted Answer

By imposing coinsurance and raising deductibles, patients share in the cost of care, which discourages unnecessary use of medical services. Covering preventive care fully encourages patients to seek necessary preventive services, which can reduce overall costs.

Question 2

What would be the consequence for insurance companies allowing patients as many treatments as they want?

Accepted Answer

Allowing patients to have an unlimited number of treatments would increase the moral hazard problem, where patients may exploit their insurance coverage by consuming healthcare services unnecessarily, leading to higher healthcare costs for insurance companies.

Question 3

After attending medical school,Georgiana has decided to encourage all of her family members to see her for their healthcare needs because she knows their health problems and has an incentive to keep them alive and as healthy as possible.What type of asymmetric information problem is Georgiana trying to correct by having her family members see her for care?

Accepted Answer

The principal-agent problem arises when there is a conflict of interest between a principal (in this case, the family members as patients) and an agent (Georgiana, as the healthcare provider), where the agent has more information than the principal. Georgiana aims to mitigate this issue by leveraging her intimate knowledge of her family's health problems, aligning her interests (keeping them healthy) with theirs.

Question 4

As the owner of a business that sells alarm clocks,Jaslene wants to hire workers who will sell as many of these clocks as possible.If Jaslene perceives the moral hazard to be strong among her sales employees,what could she do to minimize it?

Accepted Answer

Paying employees a percentage of their sales would incentivize them to sell as many alarm clocks as possible, aligning their interests with the owner's goal. This would also minimize the moral hazard as employees would only make more money if they sell more.

Question 5

After years of paying all healthcare expenses for employees,a city's largest employer has decided not to offer healthcare coverage anymore.The equilibrium price and quantity for medical services in the city would

Accepted Answer

When the largest employer in the city stops offering healthcare coverage, the demand for medical services will decrease as employees will have to pay for their healthcare service. However, the supply of medical services in the city would remain the same. Therefore, there will be excess supply in the market, which will lead to a fall in the equilibrium price and quantity for medical services in the city. So, option C is the correct answer.

Question 6

Favorable tax policies have encouraged the construction of new hospitals in the United States.How does this affect the equilibrium price and quantity for medical services?

Accepted Answer

The favorable tax policies have incentivized the construction of new hospitals which would increase the supply of medical services. As a result, the equilibrium price for medical services will decrease and the quantity will increase as there is an increase in supply. However, the demand for medical services remains constant, causing a downward pressure on the equilibrium price. Therefore, choice D is the best answer as it correctly states that equilibrium price has fallen and quantity has risen as supply has increased, but demand has remained constant.

Question 7

One method of reducing the moral hazard problem in health care insurance would be

Accepted Answer

Imposing payment limits on preventable conditions encourages individuals to take preventive measures, reducing the likelihood of moral hazard where insured individuals might otherwise engage in riskier health behaviors.

Question 8

What would be the consequence of a law that forced patients to pay all of the costs for preventive care?

Accepted Answer

The answer of What would be the consequence of a...

Question 9

The problem that arises when a party that is protected from risk behaves differently than if it were not protected from risk is

Accepted Answer

Moral hazard refers to the situation where a party behaves differently because they are protected from risk, usually by insurance or some form of guarantee. This can occur when individuals or firms take on additional risks, knowing that they will not bear the full cost of any losses that may arise. This can lead to inefficient outcomes and undermine the stability of financial systems, among other negative consequences.

Question 10

Noelle's mother has always said,"If you want something done right,you have to do it yourself." What type of asymmetric information problem does her statement reflect?

Accepted Answer

Noelle's mother's statement reflects a principal-agent problem, where the principal (her mother) is concerned about the agent's (other people's) performance, as she believes that they may not do the job well enough. This problem arises due to the information asymmetry between the principal and the agent, where the principal has better information about the task at hand.

Question 11

After Luis received health insurance from his job as an accountant,he decided to become a skydiver on the weekends because he knew that his health insurance from his employer would cover most of his medical costs if he were injured.Which of the following statements is true?

Accepted Answer

The moral hazard problem is the tendency for people to take more risks or be less careful when they are insured because they know they will be protected from some of the adverse consequences. In this case, Luis is more likely to take on a risky activity like skydiving because he knows his health insurance will cover his medical costs if he gets injured. Thus, the moral hazard problem is increased.

Question 12

Requiring patients to pay a portion of the cost of the medical care they receive is designed to reduce the severity of

Accepted Answer

Requiring patients to pay a portion of the cost of medical care they receive creates a financial barrier that incentivizes patients to carefully consider whether the services they need are truly necessary before seeking them. This helps to reduce the incidence of moral hazard, which occurs when patients overuse medical services because they do not bear the full cost of their care. By requiring patients to pay a portion of their medical costs, they are encouraged to weigh the benefits of seeking medical care against the costs they will incur.

Question 13

In a town with only one hospital,the largest employer (a local manufacturing plant)now offers health insurance to its employees.What would be the expected change to the price and quantity of medical services?

Accepted Answer

With the introduction of health insurance by the largest employer, more people are likely to seek medical services since the cost barrier is reduced. This increases the demand for medical services. Since the supply (the hospital's capacity to provide services) remains constant, the increased demand leads to higher prices and quantities of medical services sold.

Question 14

What would be the consequence of a law that forced individuals to receive an annual preventive health checkup?

Accepted Answer

The answer of What would be the consequence of a...

Question 15

________ would be minimized if hospital policy based a physician's salary on how healthy patients were following treatment by that doctor rather than the number of patients treated per year.

Accepted Answer

The answer of ________ would be minimized if hospital policy...

Question 16

Reese has a tendency to get very bored while he is driving his car and falls asleep behind the wheel.He has decided to seek the maximum amount of car insurance that he can obtain.What does this situation reflect?

Accepted Answer

This situation reflects the problem of moral hazard, where the insured party (Reese) has an incentive to engage in riskier behavior (falling asleep while driving) because the insurance company will cover the costs of any resulting damage or injury. Reese's decision to seek the maximum amount of car insurance suggests that he may be more likely to engage in risky behavior, knowing that he is protected by insurance.

Question 17

After a natural disaster destroyed one of the 10 hospitals in a city and injured nearly 75 percent of the population,what would you expect to happen to the price and quantity of medical services,ceteris paribus?

Accepted Answer

Natural disasters would decrease the supply of medical services and increase the demand for it, leading to a rise in equilibrium price. However, the effect on equilibrium quantity is ambiguous as it depends on the extent of the decrease in supply and increase in demand.

Question 18

Instead of referring to a sample of comments a doctor has provided on his own website,Catrina has decided instead to rely on reviews from friends who have been his patients.What type of asymmetric information problem is Catrina trying to correct by soliciting comments from friends?

Accepted Answer

The answer of Instead of referring to a sample of...

Question 19

After a natural disaster destroyed nine of the 10 hospitals in a city but injured only 1 percent of the population,what would you expect to happen to the price and quantity of medical services?

Accepted Answer

With nine out of ten hospitals destroyed, supply would significantly decrease as there are fewer facilities available to provide medical services. Demand, on the other hand, would increase only slightly since the proportion of injured people is very low. Therefore, we can expect equilibrium price to rise. However, it's ambiguous what will happen to equilibrium quantity as there may be alternative sources of medical care, such as temporary clinics or hospitals set up after the disaster.

Question 20

One method of reducing the moral hazard problem in healthcare insurance would be to allow insurance companies to

Accepted Answer

By agreeing to cover preventive care completely, insurance companies incentivize their customers to engage in healthier behaviors and prevent potential health issues before they become more costly to treat. This can effectively reduce the moral hazard problem by lowering overall healthcare costs and reducing the likelihood of customers taking unnecessary risks or seeking unnecessary medical treatments.

Quiz 18: Health Insurance and Health Care