File: c01; Chapter 1 Choices: Money, Medicine, and Health

True/False

1)  Direct spending by government on health care in 2010 is about $ 4,000 per person (in 2007$).

Answer: True.
Response: Check Figure 1.6 for data.  For 2007, the number is $3,500 per person, 7,556 x .48 = 3,551.  For 2010, 48,459 x .48 = $ 4,060.    
Reference: 1.2 Flow of Funds.
Level: Medium

2)  Payments to hospitals and physicians account for at least half of all health care spending in 2010.

Answer: True.
Response: (32% hospitals in 2010 + 22% physicians (2007) = 54%).
Reference: 1.2 Flow of Funds.
Level: Medium

3)  Over the past 100 years, out of pocket expenditures for health care service by individuals have decreased from about 50% to less than 10%.

Answer: False.
Response: (81% personal expenditures in 1929; 11% personal expenditures in 2010).
Reference: 1.2 Flow of Funds.
Level: Easy

4)  Third party payers account for 60% of all health care expenditures in 2010.

Answer: False.
Response: (89% of all health care expenditures in 2010 are through third-party financing).
Reference: 1.2 Flow of Funds.
Level: Easy

5)  The dollar amount of health care expenditures paid by charitable organizations and individuals has remained roughly constant over the past 100 years, if one adjusts for inflation.

Answer: False.
Response:   The absolute dollar amount has actually increased.
Reference: 1.2 Flow of Funds.
Level: Easy

6)  Ranking everyone by the amount spent on medical care, 30 percent of the total (all expenditures for all people) is accounted for by the top 1 percent of patients. The top half of the population accounts for 90 percent of total spending.  This is mostly due to cost shifting.

Answer:  False.
Response:  The statistics are correct; the explanation is incorrect.  Uncertainty is the driver.
Reference: 1.2 Flow of Funds.
Level: Medium

7)  Not only is the share of GDP to health care higher in 2010 than in 1929, the wages of health care workers have risen in relation to wages of other types of workers.  The Flow of Funds idea emphasizes that total dollars spent by individuals, government and other third party payers for health care must equal total income earned by health care providers, administrators and other health care workers.  

Answer:  True.
Response:  
Reference: 1.2 Flow of Funds.
Level: Medium

8)  Socioeconomic differences in mortality found in the U.S. are most likely attributable to lack of universal health insurance coverage.  

Answer:  False.
Response:  Socioeconomic differences in mortality are noticed in other OECD countries as well as in poorer countries like Ghana and Bangladesh.  
Reference: 1.6 Equity and Distribution.
Level: Medium

9)  When a drug company advertises it will provide a prescription drug at no charge to certain individuals who cannot afford a doctor prescribed drug, costs are most likely being shifted away from individuals who are paying high prices to those who are paying nothing.  

Answer:  False.
Response:  Costs are being shifted to individuals who are paying high prices from those who are paying nothing.  
Reference: 1.5 Research, Teaching and Charity:  Shifting Overhead.
Level: Easy

10)  A hospital system is rewarded with higher profits in the short term when it implements electronic health records which increase the timeliness of physician and patient communication.  

Answer:  False.
Response:  While it is possible that a hospital might realize higher patient revenues in the long term if it increases its quality of service in the area of communication, it is unlikely that an investment in electronic health records would result in a short term return.  Further, the idea of a hospital realizing a “profit” is questionable.  Most hospitals are “not for profit” institutions, which brings into question the maximizing goal of the hospital.  This highlights the difference between hospitals and the neoclassical profit-maximizing firm.  
Reference: 1.5 Research, Teaching and charity:  Shifting Overhead.
Level: Medium

Multiple Choice

11)  Which of the following is not an example of the fundamental theorem of exchange?
a)  You pay your optometrist $500 for a new pair of eyeglasses.
b)  You donate your old, used eyeglasses to the Lions Club, a charitable organization which recycles and distributes the glasses to needy people.
c)   You pay a fertility specialist $10,000 to perform In Vitro Fertilization procedure which does not result in pregnancy.
d)   You pay a fertility specialist $10,000 to perform In Vitro Fertilization procedure which results in pregnancy.
e)   Unknown to you, your neighbor is tapping into your cable TV service and sharing your service. 

Answer: e
Response:  The fundamental theorem of exchange rests on the idea that both parties engage in a transaction because they expect to be made better off by entering it.  In case (e), one neighbor is stealing service that the other neighbor has not agreed to provide.
Reference: 1.1. What is Economics?  
Level: Medium

12)  To reduce the ache in your knees when you work out, you buy an elastic knee brace from the pharmacy section at the grocery store.  This transaction differs from paying a surgeon to replace your knee joint because	
a)  the price of the knee brace is the same at all the local markets; however, the price for a knee replacement cannot be determined.  
b)  the knee brace is basically the same product, even though there may be different manufacturer brand names; however, each knee replacement varies slightly according to the individual patient’s needs and the physicians’ assessment and skills.
c)  you are able to pay for the purchase of the knee brace from your health savings account.
d)  you require a physician’s expertise to determine your need for the knee brace.
e)  you expect that the transaction will result in alleviating your pain.

Answer: b
Response:  Answer (b) highlights the idea that surgery involves expectations on the patient’s part about the expertise and judgment of the physician, that the price may differ because the amount of work required may vary by patient case characteristics, and that the service agrees to a certain quality of performance and follow up in the case of any adverse reactions to the surgery.  
Reference: 1.1. What is Economics?  
Level: Easy

13)  Buying a knee surgery is different from the assumptions of a purchase in the perfectly competitive market because
a)  the seller has an ethical duty to care for you.
b)  all buyers are price makers.
c)  an equilibrium price is easily reached.
d)  information is freely available about knee surgeons.
e)  none of the above.

Answer: a
Reference: 1.1. What is Economics?  
Level: Easy

14)  When a money price cannot be assigned to a health care action such as a choice an individual makes to exercise to maintain a healthy cardiovascular system, economists use the concept of opportunity cost which values the action
a)  according a rule of thumb.
b)  as the next best alternative the individual gives up in order to exercise.
c)  at the median gym membership price in the residential area.
d)  at zero price.
e)  as the number of years expected to be added to the person’s life due to exercise.

Answer: b
Response:  Opportunity cost recognizes that people have to give up doing one thing to undertake a particular course of action.  
Reference:  1.3 Economics Principles as Conceptual Tools
Level: Easy

15)  Scarcity means 
a)  time and resources spent researching a cure for breast cancer are time and resources that could have been spent researching cures for lymphoma.
b)  25 year olds might be more willing to start a family than 35 year olds.
c)  Government funding of federal programs equals the amount paid in taxes.
d)  Cost benefit analysis should always be used in evaluating medical need.
e)  money flows in a circle.

Answer: a
Reference:  1.3 Economics Principles as Conceptual Tools
Level: Easy

16)  Investments in human capital include all the following except
a)  attending college.
b)  saving money for college.
c)  exercising.
d)  maintaining a healthy weight.
e)  immunizing children against diseases.

Answer: b
Reference:  1.3 Economics Principles as Conceptual Tools
Level: Easy

17)  Government regulations and professional licensing of health care providers is a response to the nature of human response to illness and pain.  Examples include all the following except
a)  requiring hospitals to report the number of hospital acquired infections to state agency.
b)  requiring for profit hospitals to pay income tax.
c)  requiring physicians to be licensed by the state.
d)  requiring FDA approval of cancer fighting drugs.
e)  requiring hospitals receiving Medicare funds to be approved by Medicare.

Answer: b
Reference:  1.4 Health Economics:  What Makes Medicine Different?
Level: Easy

Essay

18)  Dr. Getzen differentiates choices people make concerning lifestyle, risk modification measures and illness treatments. Why do health economists seem to concentrate on measuring the illness treatments rather than lifestyle choices? 

Answer:   Deaths due to obesity rank second to deaths due to smoking.  It is relatively easier to measure the dollars spent on weight loss inducing surgery than it is to measure individual efforts to lose weight without a medical intervention like surgery.  Recognizing that the demand for services to treat obesity is really a derived demand for health points to the production of health as having several inputs stemming from individual choices:  medical care when one is sick and behavioral choices when one is healthy.  Health outcomes depend on decisions individuals make about lifestyle and risk modification over the long term.  Most decisions we study in health economics have to do with choices made once a person is sick. 
Reference: 1.3 Economics Principles as Conceptual Tools
Level: Medium

19)  If health can be viewed as a product, then there exists a production function for health.  What is the production function dependent on?  That is, what are the inputs to health?

Answer:  Inputs include all the actions one takes to be healthy:  choices to limit excess food intake, choices to exercise, choices to get a flu shot and childhood vaccinations, choices of which medical interventions to pursue if one is sick.  
Reference:  1.3 Economics Principles as Conceptual Tools
Level: Easy

20)  What do economists mean by scarcity?  What is a major resource that is scarce when one is an elderly Medicare patient?

Answer:  Scarcity means wants exceed available resources.  For the elderly, time is scarce.
Reference:  1.3 Economics Principles as Conceptual Tools
Level: Easy

21)  Jenna pays $400 for a pair of designer eyeglasses.  She realizes a week later that she really does not believe they are worth $400 and the eye doctor robbed her and she overpaid.   Use the Fundamental Theorem of Exchange to refute her claim.

Answer: Jenna had the freedom to enter into the transaction.  Her expectation was that the glasses were worth $400.  Just because her tastes change later does not mean the deal was unfair at the time she entered into it.
Reference: 1.1. What is Economics?  
Level: Medium

22) Explain why the existence of third party payers make people less sensitive to price when buying health care services in the hospital than they would have been in 1907.

Answer:   In 1907, the average patient paid 81% of health care costs out of pocket.  In 2007, the average patient share of health care costs out of pocket was 11%.  This means that third parties pay most of the bill.  Patients buy insurance contracts with the goal that if an emergency hospitalization occurs, they will not have to ask for a price list while in the emergency room.
Reference: 1.2 The Flow of Funds  
Level: Medium

23)  The university bans use of perfumes and colognes in any office, dorm room, classroom, or other public building on campus.  What is the public good that is impacted?  What is the cost?  What is the benefit?

Answer:  The public good is fresh air.  The cost is a small loss of liberty for those who enjoy wearing perfumes and colognes.  The benefit to those few individuals who may be allergic to chemical scents is a reduction in the allergens in the air.
Reference: 1.4 Public or Private Choices  
Level: Medium

24)  The Pennsylvania Health Care Cost Containment Council has a public database which included every hospital in Pennsylvania which performs hip and knee replacements.  Any person can go to the website and find statistics about a specific hospital or an individual physician’s surgery outcomes.  Statistics reported include the number of surgeries performed by the physician, the average post operative length of stay, and the average hospital charge.  For complications, such as the number of deep joint infections or problems with the device, the number of readmissions and any blood clots, the website reports whether or not the number is statistically higher, lower or the same as the expected rate. How does this population health measure benefit society?

Answer:  This population health measure provides information on the performance of hospitals, the state as a whole, and individual physicians.  Without this website, patients have very little alternatives for finding this information.  It is also possible that this website provides an incentive for physicians and hospitals to perform better if their reported performance varies negatively from the expected value.
Reference: 1.3 Quality
Level: Medium

25)  Who pays for research in the U.S. health care industry?

Answer:  It is very difficult to trace the costs of research to the end price of new products and innovations in health care.  R&D expenses may show up in the income statements of pharmaceutical companies.  Research grants from the government and from charitable trusts may fund cures for cancer such as new drugs or surgeries.  Finally, a single surgeon might develop a treatment for intraocular lens implants that leads to changes in the way cataracts are treated around the world.  
Reference: 1.5 Research  
Level: Medium