Economics of Medical Care
Economics of Medical Care
Fall 2005
Midterm Exam
Answer questions 1 and 2 and 3 of the remaining 4 questions. Each question is worth 20 points; thus, the maximum score is 100 points. Analytical depth and accuracy will be rewarded. Use graphical representation where appropriate. You may use a calculator but not any other form of assistance. The exam must be completed in Briggs 217. The Honor Code is in effect. You have 90 minutes.
“Inefficiency in economics means more than waste or sloth; it means mutual gains that could be achieved have not been achieved.” – M. Pauly
1. Regression equation interpretation
The equation below has been used to predict a nation’s medical expenditures per capita.
Expenditures /capita = -305.6 + 0.98*Income /capita + 0.0052*Pop R2 = .67
(100) (.014) (0.0095)
The values in parentheses are standard errors.
Pop refers to population in thousands
a. Assume that the mean levels for the variables are: income per capita equals $15,000 and population equals 10,000. Determine the expected expenditures per capita.
b. Given the result in a., determine the income elasticity of medical expenditures at the mean.
c. How might the information in b be used by a policy maker to suggest how to increase consumption of medical care
d. Indicate two reasons why you would not be confident in drawing inferences from the above equation.
2. Project analysis
a. Use the information in the table below to rank the following projects using cost benefit analysis (CBA). Assume a discount rate of 5%.
|Program |Year 0 |Year 1 |Year 2 |
|Benefit |Cost |Benefit |Cost |Benefit |Cost | |A |0 |100 |100 |50 |100 |30 | |B |0 |200 |150 |100 |250 |75 | |C |0 |500 |0 |100 |850 |200 | |
b. Is the rank order sensitive to the choice of discount rate? (Give an example to support your answer.)
c. Why are results in future years discounted?
d. Briefly discuss two critical assumptions needed to complete a CBA such as the one in this problem.
3. Health care markets
a. Many policy makers argue that health care is not a commodity; therefore, the “law of supply and demand” does not apply. Use the tools of economic analysis to state this claim more formally.
b. How does the existence of a monopoly supplier of services (say, a one hospital town) affect the price and quantity of services provided? Assume that the hospital acts to fully exploit its monopoly.
c. Employ the notion of elasticity of substitution to assess the long run implication of the results in b.
4. Fuchs’ “maxims” for medical care
a. Use the notion of a consumer’s utility function or indifference curve to explain Fuchs’ maxim “You can have too much of good thing.”
b. Use the notion of a production isoquant to explain Fuchs’ maxim “There is more than one way to skin a cat.”
c. Use the production possibilities frontier to explain Fuchs’ maxim “There ain’t no such thing as a free lunch.”
5. Health production
a. Use the concept of a health production function to explain (and illustrate) the relationship between medical services and health outcomes.
b. Define evidence-based medicine and indicate why health service researchers consider the concept very important.
c. Is all evidence-based medicine efficient? Explain and illustrate your answer.
6. A number of policy makers argue that the U.S. medical care system must be very inefficient in the world because we spend more per person than any other country in the world; yet, our life expectancy rates rank us 27th in the world. Analyze the validity of this claim. In your analysis be sure to address both health outcomes and cost-effectiveness.
7. Efficiency
a. Define and illustrate two types of efficiency that economists use.
b. Give two explanations, cited by economists, as to why “mutual gains that could be achieved have not been achieved.”
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