1. Health insurance companies in a country decided to introduce pre-authorization review of hospital admissions, i.e., all hospital admissions must be pre-authorized and the health care provider must contact the insurance agency to get the approval to admit a patient in a hospital. Managed Care entities introduced this type of review in 1990s and we know that pre-authorization review reduces hospital service utilization. In a diagram, show the impact of pre-authorization review of hospital admissions on "hospital care market". If hospital care and outpatient care services are complements of each other, how will this policy-change affect outpatient care market? What will be effect of this hospital admission reviews on the insurance market?
2. Over the last 10 years, the price of hospital care (out-of-pocket expenses) has declined by 10%, income of the population has increased by 24%, and proportion of elderly in the population increased by 21%. Own price elasticity of hospital care is -0.2, income elasticity of hospital care is +0.3 and elasticity of hospital care with respect to changes in proportion of elderly is +0.6. If the hospital care cost per capita in 2003 was $1,815, predict the hospital cost in 2013 (in 2003 prices) because of changes in these three factors (use point elasticity formula). Find the per-capita hospital cost in the USA in 2013. Using CPI of 2003 and 2013 (annual average) convert 2003 predicted cost into 2013 prices [the CPI numbers are 184 and 238 for these two years]. Compare your estimate of the cost with actual per capita cost in 2013. Explain the possible reasons for the difference between these two cost numbers (state at least three reasons).
3. What is "adverse selection" in the health insurance market? How does adverse selection affect the health insurance market? Describe at least two approaches insurance companies can adopt to reduce the problems associated with adverse selection.
4. Demand for outpatient care per day in a community is given by the following equation:
Q=650 -2 P + 0.01 Y, where P is the price of the product and Y is the income. Draw the demand curve for outpatient care if the average income of the population is $25,000. Draw the curve again when the income of the population increases to $40,000. A planner calculated that the "need" for outpatient care in this community should be 500 per day. Indicate this level of utilization in your diagram. If the market price of outpatient service is $300 per unit (when average income was $25,000), what policy can we adopt to ensure that utilization becomes equal to the estimated need? Illustrate your policy option using the diagram.
5. Using hypothetical cost function of a hospital, derive the supply curve of hospital services if the hospitals are "profit maximizers". What is the relationship between the supply curve and the marginal cost curve? Explain.