Question 1

Individuals who have access to large-group coverage are _______ likely to fall victim of cherry-picking behavior because the total cost of health insurance is distributed among a _______ number of subscribers.

Accepted Answer

Individuals in large-group coverage are less likely to be subject to cherry-picking because the risks and costs are spread out over a larger number of subscribers, reducing the impact of high-cost individuals on the overall group.

Question 2

Third-party payments provide incentives for the adoption of new technologies that may carry low benefits with high costs.

Accepted Answer

Third-party payments can shift the cost-benefit analysis for the adoption of new technologies. If someone else is paying for the technology or its use, then the decision-maker may not be as careful in considering its costs and benefits. This can incentivize the adoption of new technologies that are not truly valuable, as the costs are not felt directly by the decision-maker.

Question 3

Which of the following reasons might explain why health insurance purchased as a group might be less costly than coverage purchased individually?

Accepted Answer

Group health insurance plans are generally less costly than individual plans for several reasons. Firstly, a larger group provides greater bargaining power when negotiating rates with insurers. Secondly, the risk is spread over a larger number of people, which can lead to lower premiums per person as the risk is more predictable from the insurer's perspective. Lastly, marketing and administrative costs are lower for the provider when selling a group plan compared to individual plans, as they deal with one entity (e.g., an employer) rather than many individual customers.

Question 4

_______ exist when the average total cost of providing insurance coverage decreases as a firm provides coverage for larger groups of people.

Accepted Answer

Scale economies refer to the cost advantages that firms achieve when they increase their scale of operation. In the context of insurance, scale economies exist when the average total cost of providing coverage decreases as a firm provides coverage for larger groups of people, such as when the fixed costs of administrative and overhead expenses can be spread over a larger number of insured individuals.

Question 5

_______ occurs when insurance companies structure plans that provide an incentive for healthier consumers to enroll while discouraging enrollment of higher-risk individuals.

Accepted Answer

Cherry-picking refers to the practice where insurance companies design their plans in such a way that they attract individuals who are less likely to use medical services (healthier consumers) and deter those who are more likely to need medical care (higher-risk individuals). This is done to minimize the insurer's risk and financial liability.

Question 6

_______ reasons that firm-size classes with expanding populations are more efficient than those with shrinking populations over time.

Accepted Answer

Survivor Theory posits that firms or organizational forms that are more efficient or better adapted to their environment are more likely to survive and grow over time. Thus, firm-size classes with expanding populations suggest they are more efficient, as they are surviving and expanding, in contrast to those with shrinking populations.

Question 7

Which of the following reasons might explain why managed care organizations might be able to lower healthcare costs with premiums similar to fee-for-service plans?

Accepted Answer

Managed care organizations can lower healthcare costs through various mechanisms, including efficient management and negotiation for lower service prices, which might be offset by higher administrative costs (A). They also compete on service offerings, not just price (C), and may strategically set premiums to be competitive (B), contributing to their ability to offer lower or similar premiums compared to fee-for-service plans.

Question 8

An increased HMO presence in insurance markets will likely increase premiums for consumers.

Accepted Answer

HMOs often have lower premiums compared to other types of insurance plans due to their emphasis on preventative care and cost-saving measures. Therefore, an increased HMO presence in insurance markets would likely lead to more competition and potentially lower premiums for consumers.

Question 9

Scale economies may serve as a barrier to entry in the private health insurance market by mandating a tiered benefit system.

Accepted Answer

Scale economies serve as a barrier to entry primarily through the cost advantages larger firms have over smaller ones, not by mandating a tiered benefit system.

Question 10

People obtaining health insurance as part of a group are likely to pay higher premiums than those who acquire coverage individually.

Accepted Answer

Group health insurance plans typically offer lower premiums compared to individual insurance plans because the risk is spread across a larger group of people, making it less expensive for each member.

Question 11

_______ occurs when consumers have less incentive to avoid risky behaviors.

Accepted Answer

Ex ante moral hazard refers to the situation where consumers have less incentive to avoid risky behavior before a transaction takes place, due to the knowledge that they will not bear the full cost of any negative consequences. This is in contrast to ex post moral hazard, which occurs after a transaction, when a party may change their behavior due to the presence of insurance or other safety nets. Adverse selection and asymmetric information refer to other issues related to incomplete or asymmetric information in a transaction.

Question 12

To maximize profits, a dominant insurance provider will set the price for insurance such that the marginal revenue of providing coverage is _______ of providing coverage.

Accepted Answer

In a profit-maximizing scenario, a dominant insurance provider, like any firm aiming to maximize profits, will set the price such that the marginal revenue (MR) of providing coverage is equal to the marginal cost (MC) of providing that coverage. This principle is a fundamental concept in microeconomics, ensuring that the firm is operating at its most efficient and profitable point.

Question 13

_______ is the situation where insured individuals alter their behavior because they are no longer financially responsible for the full cost of their behavior.

Accepted Answer

Moral Hazard refers to the situation where the insured individuals change their behavior because they are not liable to pay the full cost of their conduct. For instance, an individual who knows that their insurance policy will cover the cost of healthcare might tend to engage in riskier behavior like unhealthy diets or not taking their medication as prescribed.

Question 14

_______ occurs when high-risk individuals subscribe to an insured group of low-risk individuals.

Accepted Answer

Adverse selection occurs when high-risk individuals are more likely to participate in insurance plans compared to low-risk individuals, resulting in higher claims and higher premiums for the insurance company. This can be a consequence of asymmetric information where the high-risk individuals have better knowledge about their likelihood of making a claim compared to the insurance company.

Question 15

Health insurance mandates may result in market inefficiencies if the marginal cost of additional coverage exceeds the marginal benefit received.

Accepted Answer

Health insurance mandates require individuals to purchase coverage that may not provide much additional benefit to them. This can result in market inefficiencies, as the cost of providing these additional benefits may drive up the price of insurance for everyone. Additionally, some individuals may choose to forgo coverage altogether if they cannot afford the higher prices, which can result in adverse selection and further market inefficiencies.

Quiz 11: The Private Health Insurance Industry

Individuals who have access to large-group coverage are _ likely to fall victim of cherry-picking behavior because the total cost of health insurance is distributed among a _ number of subscribers.