Suppose a particular population has two kinds of health risks, high and low. Let the expected annual health care costs for the high risk be $10,000,…

1.    Suppose a particular population has two kinds of health risks, high and low. Let the expected annual health care costs for the high risk be $10,000, and for the low risk, half that. If there are twice as many low risk as high risk individuals, and if the one insurer’s administrative load is 20%, what would the community rated premium be if everyone is compelled to and able to buy health insurance? 

     a. $7500


   c. $12,000

   d. $8000

2.    Now suppose insurance rules are changed to permit a new insurer (B) to enter this marketplace and be allowed to exclude the high risk due to pre-existing condition exclusions while the other incumbent insurer (A) is forced to still charge a community rate (as in the ACA). Assuming loads remain at 20% in long run equilibrium, what would the premiums be in each market, (low risk, high risk)?

 a. $5000, $10,000

  b. $6000, $12,000

   c. $7500, $15,000

   d. $8000, $11,000

3.    Now let’s assume the mandate to purchase insurance has been repealed, and determine if Bill, a high risk person, will continue to buy insurance.  Bill’s income when not sick is $50k, but when sick it’s $30k (since if uninsured he would have to spend $20k on health care). If his utility function is u = u(INC) = INC1/2 (i.e., the square root of the amount of income left to spend after health care), and if the probability of Bill being sick is .5, how much would he be willing to pay for health insurance that would cover all health care costs?

 a. $20,000

  b. $10,000

   c. $10,796

    d. $11,114

4.    Would Bill purchase insurance without a mandate after the separating equilibrium comes to pass?

Yes or No

5.    Moral 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; $22,500,000

6.    Which of the following does NOT generate negative externalities in part through health care costs?

a. Smoking

b. Alcohol abuse 

c. Antibiotic overuse

d. Opioid abuse

 e. None of the above

7.    Why are taxes, one traditional remedy for negative externalities, less than ideal for smoking cessation in the United States?

a.    Nicotine is addictive/demand is inelastic, and smokers are mostly poor, so in effect cigarette taxes reduce the quality of life of people we’re trying to help without substantially reducing smoking

b.    Demand is inelastic, and smokers are mostly rich, so they don’t reduce smoking as a result of taxes

c.       Demand is elastic, and smokers are mostly old, so taxes reduce smoking but cause increased anxiety among the elderly

d.    Demand is elastic, and smokers are mostly young, so they quit smoking but are then more likely to experiment with illegal drugs


Racial and ethnic disparities in health outcomes have been persistent features of the US health care system. One complexity in sorting out causation and appropriate responses is that race and ethnicity are correlated with so many other socioeconomic characteristics. Which of the following is NOT ALSO a plausible explanation, beyond racism, for the persistence of disparities? 

 a. Education

 b. Income

 c. Stress  

 d. Political environment

9.    In the Grossman model of the demand for health, which of the following is NOT a role played by health?

   a. Consumption good

  b. Input into the production of all goods

  c. Capital good

  d. Public good

10. The fundamental tradeoff in drug pricing policy is between:

 a. Safety and efficacy

  b. Safety and speed to market

  c. Efficacy and R&D spending

  d. Incentives to innovate and affordability

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