Download 4 - Economics

M.A. Examination
Health Economics – December 2000
Dr. Goodman, Dr. Jensen
Instructions: You are to do three of the four (4) questions on this exam in as much detail
as is necessary to answer them appropriately within the one hour time period. Each
question is worth 33.3%, and the separate parts of each question are weighted equally.
Good luck.
1. Suppose that you, as an employer, are currently providing health insurance to all your
workers. You now learn that half of your workers are also covered under their
spouses’ insurance plans, but that your plan is the primary insurer for these duallycovered workers. Assume that each worker’s demand for medical care is inversely
related to the price he pays out-of-pocket for care, and that each is risk averse. Your
policy pays 80% of all medical expenditures incurred by your workers, and the
secondary policies for dually-covered workers pay 80% of those expenses left unpaid
by your plan.
a. What is the total insurance of a dually-covered worker? What is his out-of-pocket
price as a function of the gross market price of care, P?
b. Are claims under your plan higher or lower than if these workers were not duallycovered? Using a diagram, show by how much your claims change due to the
presence of the dual coverage.
c. In terms of your diagram, what part of total claims are paid by your plan and what
part are paid by the secondary insurer?
d. Is there anything you can you do to reduce your insurance outlays, without
harming the welfare of your workers? Think creatively and explain.
2.
Consumers are risk-averse. Each faces the possibility of a loss L, but the probability
of a loss varies across consumers. Some have probability p1, others have probability
p2, where p2>p1. Deductible policies are available in the market.
a. Suppose first that a non-profit monopoly insurer sells coverage, but the firm
cannot identify which individuals are high-risk. The insurer must break even on
its total book of business, but not necessarily on each contract it sells. There are
no loading charges for the insurer. Will equilibrium be a pooling or separating
equilibrium, and why? Characterize the equilibrium coverage of high-risks and
low risks. Draw a diagram illustrating equilibrium.
b. Now suppose instead that the market is competitive, but that insurers still cannot
identify risk types. Will your answer change, and if so, how? Characterize the
equilibrium coverage of high-risks and low risks in this case. Draw a diagram
illustrating equilibrium.
3. Consider the following demand curve for health care visits.
a. Without insurance calculate total
health expenditures if the price
is $10 per visit.
P
10
b. Suppose that the consumer buys
an insurance policy which provides visits
at a coinsurance rate (the percentage paid
by the patient) of 0. Calculate
consumer and insurer expenditures.
c. Calculate the net economic benefits
to the consumer (reflected by the demand
curve) of the incremental benefits from this policy.
Demand
5
Q
15
d. Are policies of this type beneficial to society? Explain your answer.
4. Consider the following cross-national demand curve for health care.
ln Q = a + 1.1 ln y – 0.4 ln p.
where
q = quantity of health care per person
y = national income per person
p = price of health care
a. Calculate the income and price elasticities of health care demand.
b. Consider the share s = pQ/y of the economy spent on health care. Based on the
parameters above, what would you expect to happen to the health share if income
rises? Why?
c. Based on the equation above, what would you expect to happen to the health
share if price rises? Why?
d. Looking across countries, what other variables might be important in explaining
health expenditures? Why?