Health Economics Final Examination

Answer the following five questions.

I. Explain the reasons for less than 100% health insurance coverage in the private market. Using a diagram indicating cost of insurance and willingness to pay risk premium, show the phenomenon of the presence of uninsured individuals in the market-oriented health system.

What are the characteristics of the individuals/groups that remain uninsured in a private health insurance market? Suggest two policy options to increase insurance coverage of these groups. Use the diagram to illustrate how the policy options will affect the size of uninsured.

II. In the USA buying and selling of human organs is illegal. Those who need organs cannot buy organs from the market and those who donate organs cannot sell their organs. We also know that many more people are waiting for organs than the number of human organs available for transplantation. Draw this situation in a diagram (i.e., draw the supply and demand curves for human organs). Now assume that donors are allowed to sell their organs but those who need organs cannot buy the organs from the market. Show this changed situation in the same diagram. Assume that an intermediary entity buys the organs and then provide the organs free of charge to those who need them. Will this policy increase the total number of organs available in the market for transplantation? Discuss.

III. What is "monopolistic competition"? Why do we consider physician care market as monopolistic competition? Why is the price elasticity of demand of one physician's service greater than 1.0 while the demand elasticity of physician care in the market is usually less than 0.4?

Draw the demand and cost curves of a physician firm to illustrate the equilibrium quantity and fee. In a monopolistic competition situation, why is it important to adopt legal restrictions against sharing of the physician revenue between specialists and the referring physicians? How important is it to restrict revenue sharing between physicians and diagnostic centers and laboratories? Why?

IV. Two health projects save lives over a number of years. The project activities happen in year 0 (current year). The projects do not spend any money beyond the current year. The costs of the project activities in the current year are $15 million for project A and $31 million for project B. Life years saved (LYS) by these two projects are shown in the table below.

We want to choose one of these two projects for implementation based on cost per life years saved.

Assume that the time trade-off rate (or discount rate) is 3%. Using 3% discount rate, calculate the LYS in current year terms. Find the cost per LYS and indicate which project you will adopt for implementation and why?

Now assume that the time trade-off rate is 10%. In this case, which project would you choose for adoption and why?

V. Demand and supply curves of physician care services per day are given by the following equations:

Q_d = 1200-8 P and Q_s = -100+5P, where Q is the number of visits in a day and P is the fee per consultation.

(a) Find the equilibrium quantity and fee in this market. What is the total expenditure in the market per day?

(b) Introduce insurance with 20% coinsurance. The insurance is provided free of charge (no premium). What will be the impact of introducing the insurance on quantity, consultation fee and health care expenditure per day? Compare these after-insurance levels with the pre-insurance situation.

(c) Rather than offering insurance with 20% coinsurance, assume that the insurance was introduced with a copayment of $110 per visit. What will be the effects of this insurance on the market compared to no-insurance situation? [Discuss the effects on quantity, fee and expenditure]

(d) Start from the no-insurance situation again (using the demand-supply curves). Introduce insurance with indemnity payment of $60 per consultation. Compare the market outcomes of this insurance with no-insurance situation.