## Student Solutions Manual to Accompany Health Economics, 2e

by Sloan, Hsieh

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Student Solutions Manual to Accompany (pg. i)
Student Solutions Manual to Accompany (pg. iii)
The MIT Press (pg. iii)
Cambridge, Massachusetts (pg. iii)
London, England (pg. iii)
Contents (pg. v)
Chapter 1 (pg. 1)
Introduction and Overview (pg. 1)
1.1 Suppose the government in a middle-income country announced its policy goal was to implement a universal health insurance program within five years. Would implementation of this policy increase the demand for health economics research in this coun... (pg. 2)
Chapter 2 (pg. 3)
2.1 A patient with arthritis of the knee is planning to have a knee replacement. He has applied for a loan for this surgery; the loan has an annual interest rate of 6 percent. The artificial knee can function for 10 years before it needs to be replace... (pg. 4)
b. Assume the artificial knee depreciates at a constant rate every year until the time of replacement, which is 10 years hence. What is the cost of this capital? (pg. 4)
c. Suppose that instead of a loan, the patient plans to pay for the surgery from his or her own savings. Assume that the bank’s interest rate on savings deposits equals its rate on loans. Does this change your answer to (b)? Why or why not? (pg. 5)
d. Draw the COC (cost of capital) line on a graph, with health capital on the x-axis and the COC rate on the y-axis. What is the slope of the COC schedule? Explain why it looks the way it does. (pg. 5)
2.3 Assume the health production function is h = 365 – 1/H, where h is the number of healthy days a person has in each year and H is the person’s health capital. Assume this person earns a wage of \$100/day, and the marginal cost of health investment π... (pg. 6)
b. What is the cost of health capital in this problem? (pg. 7)
c. Find the optimal level of health this person demands under the above conditions. (pg. 7)
d. Suppose the person acquires a chronic disease and his health depreciation rate rises to 35 percent annually. How does this change your answer to part (c)? (pg. 7)
e. Suppose instead of having a chronic disease the person experiences a recession and his wage falls to \$50/day. Assume the change in the price of time inputs changes the cost of a unit of health investment by 10 percent. Show graphically how this cha... (pg. 8)
f. Now focus on the role of human capital in this model. Suppose a person’s educational attainment increases. How does the MEC curve shift in this case? How does this shift affect the person’s investment in health capital? (pg. 8)
2.5 Suppose a person is asked a standard gamble question about three kinds of diseases. For each disease, the person decides to undergo surgery if the expected utility from the operation exceeds or is equal to the patient’s utility if he or she does n... (pg. 9)
b. If the diseases are liver cancer, pneumonia, and dental caries, which one is most likely to be denoted as A above? (pg. 9)
Viscusi and Evans (1990) took a similar approach to analyzing the loss in utility from being healthy to becoming sick. In the experiment they discussed in their paper, workers were randomly assigned to label four different chemicals: asbestos, TNT (pg. 10)
is the hourly wage received from the labeling work and (pg. 10)
U(death) = 0. (pg. 10)
d. Which labeling work must have a higher wage, asbestos or chloroacetophenone? (pg. 11)
e. What is the wage function for chloroacetophenone? Use wS as the benchmark again. Which value(s) do you need to be able to solve this problem? (pg. 11)
f. One major implication of Viscusi and Evans’s research is that people may have different utility functions when healthy than when sick. Suppose the utility function is V(w) = 0.5lnw if the worker is sick but alive. How does this change your answ (pg. 11)
Chapter 3 (pg. 12)
3.1 Suppose a demand curve has the form x = 100 – 10p. What is the quantity consumed at p = 5? What is the elasticity of demand at p = 5? Suppose the demand curve is a demand curve facing the firm, such as a physician’s office. At what level of p is m... (pg. 13)
3.3 An individual has preferences for an aggregate consumption commodity (x) and health (H) represented by a utility function U(x, H) = αln(x) + βln(H). The price of the aggregate commodity (x) is px and the (pg. 15)
b. Calculate the price elasticity of demand for medical care. (pg. 16)
3.5 The following questions concern the use of deductibles. (pg. 17)
a. Show the effect graphically of a deductible on the demand for medical care. (pg. 17)
b. Now assume the policy does not have a deductible but pays 100 percent of expenses after a stop loss of \$2,000. Show this graphically. (pg. 20)
3.7 Explain which of the following types of insurance coverage would more likely cause the most major problems resulting from moral hazard. (If you do not know some of the medical terms, check out Google.com.) (pg. 21)
b. arthroscopic surgery for knee injuries or amputation of the foot; (pg. 21)
c. family counseling or electroconvulsive therapy; (pg. 22)
d. decongestants or antibiotics. (pg. 22)
b. Who would be more likely to use a “free clinic” (free in the sense that the money price of services = 0)? Why? (pg. 23)
3.11 Assume there are two drugs designed to treat high blood pressure, drug A and drug B. Blood pressure readings from patients taking drug A are consistently higher than those of patients taking drug B. Does this mean that drug B is more effective th... (pg. 24)
Chapter 4 (pg. 25)
4.1 Suppose a person is diagnosed with lung cancer. Describe four types of pecuniary losses and two types of nonpecuniary losses that are likely to arise. (pg. 26)
4.3 Based on the same information reported in the above table in exercise 2, calculate the maximum amount that John is willing to pay to avoid the risk of income loss resulting from becoming sick if the probability of becoming sick increases from 0.4 ... (pg. 27)
4.5 Assume that the individual is a risk lover. The individual can purchase a gamble with a 0.01 probability of winning \$10,000. Assume the person has an annual income of \$10,000. What is the actuarial value of the gamble? Show graphically why the per... (pg. 28)
4.7 Considering each of the following pairs, in which of the two is purchase of health insurance more likely? Explain your answers. (pg. 29)
b. hospital care versus a physician office visit; (pg. 29)
c. a probability of getting sick of 0.95 versus a 0.5 probability of getting sick; (pg. 30)
d. a tax subsidy (the premium of health insurance is not subject to any form of taxation) versus a tax credit. (pg. 30)
Chapter 5 (pg. 31)
5.1 The following two tables are mean physician net income by physician age after expenses and before taxes (in thousands of dollars), by year and by specialty. (pg. 32)
Based on data reported in these two tables, compute the present value of a medical education, assuming a 3 percent real discount rate. (pg. 33)
5.3 Suppose the country’s national health insurance authority cuts the price it pays physicians for performing a procedure. Use a goods-leisure analysis (goods or income on one axis and leisure on the other) to answer the following questions: (pg. 34)
b. Isolate income and substitution effects from a decrease in the wage rate. (Note: In isolating the income and substitution effect, the practice is to draw a line parallel to the new price line and tangent to the indifference curve where the person w (pg. 37)
c. Now assume that Medicare is the only payer. Medicare decreases the unit price of a service from \$34 to \$24. Show how the goods-leisure analysis is useful for addressing this question. (You will need to translate price per unit of service into work (pg. 39)
5.5 In 1988, Medicare cut the payment for open-heart surgery by 2–15 percent. Answer the following questions: (pg. 40)
b. What is the substitution effect induced by this fee cut, again for thoracic surgeons? (pg. 40)
c. What happens when the income effect dominates the substitution effect? Does an insurer realize savings from a fee cut when the income effect dominates the substitution effect? Explain your answer. Suppose you were director of your country’s nationa... (pg. 40)
Chapter 6 Hospitals (pg. 42)
6.1 Hospitals are thought to be subject to economies and diseconomies of scale and scope. What is meant by economies (diseconomies) of scale and scope? What are sources of scale economies (diseconomies) and scope economies (diseconomie (pg. 43)
6.3 Now assume that the hospital is a monopolist with a demand function that incorporates quality of care as well as quantity. Quality enters into both the demand and cost functions according to p = 100 – 3x + 4√y and C = 4x2 + 10x + y, where p is the... (pg. 47)
6.5 As described in the chapter, in Newhouse’s model, the hospital maximizes utility, which depends on levels of quantity and quality of care, subject to a break-even constraint (price equals average cost). Use this model to analyze the effects of (pg. 48)
b. an increase in the number of persons with health insurance coverage in the hospital’s market area; (pg. 48)
c. implementation of a fixed dollar subsidy per unit of hospital care by the city government. (pg. 49)
6.7 In some settings, physicians are employed on a fixed salary basis by the hospital. In others, physicians function as independent entrepreneurs and bill for care they deliver to hospitalized patients separately from the hospital’s bill for its serv... (pg. 50)
6.9 Assume there is only one hospital in a small town. This hospital faces a demand function given by p = 304 – 2x, where p is the price of hospital care and x is the quantity of hospital care, and a cost function given by C = 500 + 4x + 8x2, where C... (pg. 52)
b. If the local government were to further lower the maximum price that the hospital can charge to patients to 240, compute the effect of this new price ceiling on the hospital’s quantity of care and its revenue and profit, compared to the older, high... (pg. 54)
Chapter 7 (pg. 55)
7.1 Suppose a physician receives a fixed payment ( pˆ ) for (pg. 56)
c. Use a graph similar to figure 7.1 to show how to decide what the socially optimal level of care is. (pg. 58)
d. If the court has sufficient information to set the (pg. 59)
e. Using a graph, explain the distinction between strict liability and the negligence rule. Under what condition do we expect that these liability rules will achieve the same level of optimal care? (pg. 59)
7.3 In recent years, many organizations around the world have published rankings of both universities and hospitals. For example, the U.S. News and World Report has regularly published “The Top 10 Best Universities in the US” and “the Top 10 Best Hosp... (pg. 60)
b. Would you expect there to be any difference between private and public agencies in performing rankings of hospitals? Suppose both a private firm and a public agency were to publish a “10 Best Hospitals” list for the city where you live. Which organ... (pg. 61)
c. List the pros and cons of hospital rankings from the viewpoint of the consumer. (pg. 62)
d. How would you expect hospitals to respond to published hospital rankings? Is there any evidence to support your argument? (pg. 62)
7.5 In table 7.1, we list four incentive mechanisms (professional norms, regulation, market competition, and tort law) for ensuring high levels of health care quality. (pg. 63)
b. Do the four mechanisms listed in table 7.1 also ensure high quality levels for higher education (university)? Why or why not? (pg. 63)
c. Medical malpractice claims (i.e., patients suing their physicians and/or hospitals) are fairly common in many countries. Is it common for students to sue their university professors for a suboptimal quality of teaching? Can you conceive of tort (pg. 64)
Chapter 8 (pg. 65)
8.1 The Good Works General Hospital has a local monopoly in the sale of hospital services in its market area. Its product demand curve is p = 30 – 0.4x, where p is the price of a hospital day and x is the number of hospital days per year at Good Works... (pg. 66)
8.3 Consider the community (city or town) in which you live. Are local hospitals likely to be monopsonists? Why or why not? (pg. 68)
8.5 Following the concept of full price in exercise 11 of chapter 3, let Y represent full income, where Y = wage income + nonwage income. (pg. 69)
b. Based on your answer to (a), would you expect the elasticity of labor supply with respect to wage to be higher or lower for a “female profession” (such as nursing) compared to a “male profession” (such as a pilot), other things (pg. 70)
8.7 Suppose the aggregate demand curve for nurses in an island city is Nd = 300 – 5w, where w is the hourly wage rate for nurses and Nd is the number of nurses demanded in this city. The supply of nurses is Ns = 5w – 100, where Ns is the number of nur... (pg. 71)
b. If the city government decides to recruit nurses from overseas and this policy shifts the supply of nurse to (pg. 72)
c. If the city government further announces raising the wage rate for nurses from 30 to 40 and the policy that allows recruiting nurses from overseas remains valid, does the city government solve the problem of nursing shortage or create a new problem... (pg. 73)
Chapter 9 (pg. 74)
Pharmaceutical Manufacturers (pg. 74)
9.1 Suppose that the demand function of a pharmaceutical firm is p = 20 – 0.5x, where p is the price of a prescription drug and x is the number of prescription drugs demanded by patients. For simplicity, assume that the pharmaceutical firm can produce... (pg. 75)
b. Assuming that generic competition will drive down the price to marginal cost, compute the quantity of this product demanded when the patent expires. (pg. 75)
c. Based on your answer, calculate the welfare loss that the patent system imposes on this product. (pg. 76)
9.3 Use equation 9.1 to indicate which of the following prescription drugs are likely to receive relatively high advertising budgets from their parent pharmaceutical companies: Explain your answers. (pg. 77)
9.5 Some researchers argue that pharmacogenomics (PG), which is the science of using genomic markers to predict drug response, can substantially reduce expected drug development costs through increasing the probability of technical success, requir (pg. 78)
Chapter 10 (pg. 79)
10.1 Define the profit function of the private insurer in the line of health insurance. That is, what are the revenues and costs of the insurance firm? (pg. 80)
Based on your definition, analyze the effects of the following exogenous changes on the insurer’s profit: (pg. 80)
b. an increase in the insurer’s share price in the stock market; (pg. 80)
An increase in the insurer’s share price in the stock market also increases retained earning and hence internal funds for investment. (pg. 80)
c. a general increase in health care expenditures; (pg. 81)
d. an increase in population size; (pg. 81)
e. an increase in the country’s unemployment rate; (pg. 81)
f. a shift of the payment system from fee-for-service to capitation; (pg. 82)
10.3 Explain the differences among the following three types of government intervention in the health insurance market: (1) public subsidy, (2) mandated insurance benefits, and (3) direct public provision of insurance coverage. If (pg. 83)
10.5 Compare differences between public health insurance and private health insurance on the following dimensions: (pg. 85)
a. the decision to adopt new medical technologies; (pg. 86)
d. satisfying differences in consumer preferences (consumer preference heterogeneity); (pg. 88)
e. providing preventive services. (pg. 88)
Chapter 11 (pg. 89)
11.1 Use the concepts of cost of capital (COC) and marginal efficiency of investment (MEI) that you have learned in chapters 2 and 9 to analyze the effect of managed care on the diffusion of new and expensive medical technology in a hospit (pg. 90)
11.3 Recall the discussion in chapter 5 about a long-run decision involving practice location. Suppose that the World Trade Organization (WTO) signed a treaty among all member countries guaranteeing no legal impediments to physician movement among (pg. 91)
Chapter 12 (pg. 93)
12.1 Define “retrospective cost-based reimbursement system” and “prospective payment system.” Suppose you were asked by a policy maker to design the payment system for a public insurance program. If the policy maker would like to use the payment syste... (pg. 94)
12.3 Suppose country A traditionally relies on (pg. 96)
12.5 Finkelstein (2007) reported that implementation of the Medicare program in the United States led to a 37 percent increase in real hospital expenditures between 1965 and 1970. However, based on estimates from the Rand HIE study (see chapte (pg. 97)
12.7 Use three graphs to show the effect of Medicaid fees on the physician’s incentive to accept Medicaid patients. Graph A is a horizontal line that represents the demand curve for Medicaid patients. Graph B is a downward-sloping curve that represent... (pg. 98)
a. How will the physician set the price for non-Medicaid patients if the physician pursues maximum profit? (pg. 100)
b. Under what conditions will the physician not accept Medicaid patients? Show graphically. (pg. 101)
c. Will the physician be more likely to accept Medicaid patients if the government increases the Medicaid fees paid to the physician? Show the effect of an increased Medicaid fee graphically. (pg. 102)
12.9 Assume a country’s health care expenditures (HCE) are financed from two sources: (1) public expenditures (PE) and (2) out-of-pocket payments (OOP). Thus, HCE = PE + OOP. Given the following relationships: ( (pg. 103)
b. If the new funds injected into the health care sector lead providers to raise fees, with the result that HCE/GDP increases from 5 percent to 6 percent, will this policy reduce the share of out-of-pocket payments in the health care expenditure? Calc... (pg. 104)
c. If the new funds injected into a health care system induce a high rate of health care inflation caused by increased wasteful health care spending, with the result that HCE/GDP increases from 5 percent to 10 percent, will this policy reduce the shar... (pg. 104)
d. Based on the scenarios in parts (a) to (c) of this question, explain how a government could use the new funds to promote effective and efficient health care provision so that the new public sector funds lead to a reduction in the share (pg. 106)
Chapter 13 (pg. 107)
13.1 For which of the following services is public supply likely to be superior to private supply? Discuss each service and justify your answers. (pg. 108)
b. schooling; (pg. 108)
c. vaccination; (pg. 109)
d. housing. (pg. 109)
13.3 Collect data on GDP per capita and percentage of out-of-pocket payment in total health expenditures for at (pg. 110)
b. Did any country become an outlier in your figure? How do you explain this exception? (pg. 110)
13.5 In recent years, government revenues from taxing tobacco and selling lottery tickets have been widely used to finance health care provision and services. Suppose both China and India were to adopt a major health care reform to reduce their citize... (pg. 111)
13.7 Many countries have a “mixed” health care system, that is, a private health care sector exists alongside a larger public health care sector. Under such a system, individuals may choose to “opt out” of the public system and receive care from priva... (pg. 113)
Chapter 14 (pg. 114)
14.1 Given the information listed in table 14.1, suppose that 1,000 individuals are in the poor health state in period t and θPG is 0.45, θPP is 0.40, and θPD is 0.15 without the drug. With the drug, the probabilities are 0.65, 0.30, and 0.05, respect... (pg. 115)
the drug. (pg. 115)
14.3 Referring to chapter 2, suppose you were asked the following trade-off question. Assume you had a particular disease (you need to pick a specific disease) and there was a surgical operation that would (1) either cure you of the diseas (pg. 117)
Chapter 15 (pg. 118)
15.1 Lichtenberg (2001) estimated the benefits and costs of newer drugs. The results are summarized as follow: (pg. 119)
a. Based on the above findings, identify the benefits of using newer drugs. (pg. 119)
b. Given the above information, do you have enough information to conduct a CBA for using newer drugs? Justify your answer. (pg. 120)
15.3 Bishai and Lang (2000) used the stated preference approach to estimate the WTP for a one-month reduction in a waiting time for cataract surgery. They found that an average cataract patient in Barcelona, Spain, would be willing to pay US\$107 & (pg. 121)
Chapter 16 (pg. 122)
16.1 Collect data on health expenditures per capita (HE) and life expectancy at birth (LE) for at least fifteen countries in a given year, and run a simple regression in which LE is the dependent variable and HE is the independent variable (pg. 123)
16.3 Use the concept of marginal efficiency of investment (MEI) and cost of capital (COC) described in chapters 2 and 9, and extend this framework to consider how parents decide the optimal year of educational investment for their children (pg. 126)

#### Frank A. Sloan

Frank Sloan, awarded the Victor R. Fuchs Award for Lifetime Contributions to the Field of Health Economics in 2016, is J. Alexander McMahon Professor of Health Policy and Management and Professor of Economics at Duke University. He is coauthor of The Price of Smoking (2004) and Medical Malpractice (2008) and coeditor of Incentives and Choices in Health Care (2008), all published by the MIT Press.

#### Chee-Ruey Hsieh

Chee-Ruey Hsieh is a Research Professor of Health Economics at Duke Global Health Institute, Duke University, and the Global Health Research Center, Duke Kunshan University.

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