Chapter 14 — Exercises

Section A — The three market failures

A1. A patient visits the ER with abdominal pain. The doctor orders an MRI ($1,500) and blood work ($400). The patient's copay is $50 total. Identify the information asymmetry, the moral hazard, and the principal-agent problem in this transaction.

A2. A 25-year-old healthy person decides not to buy health insurance because the $400/month premium seems too expensive relative to their expected healthcare needs. Identify the adverse selection risk this creates for the insurance pool.

A3. "If patients had to pay the full cost of their care, they would use less healthcare and costs would fall." Apply the moral hazard framework. Is this claim correct? What are the risks of high cost-sharing?

A4. The RAND Health Insurance Experiment found that people with lower cost-sharing used more healthcare. Was all of the additional use wasteful? What kinds of additional use might be beneficial?

A5. Why is the principal-agent problem in healthcare worse than in most other markets? Compare to a car mechanic (another principal-agent situation). What makes healthcare different?

Section B — The US system

B1. The U.S. spends roughly $13,500 per person per year on healthcare. Germany spends about $7,400. Both are rich countries with aging populations. List three reasons the U.S. spends more.

B2. "It's the prices, stupid." Look up the price of an MRI, a hip replacement, or a day in the hospital in the U.S. vs. one other country. What is the ratio? What explains the difference?

B3. Administrative costs account for 15–30% of U.S. healthcare spending. What specific administrative activities contribute to this? Why would a single-payer system have lower administrative costs?

B4. About 26 million Americans have no health insurance. Why is this bad not just for the uninsured but for the healthcare system as a whole?

B5. Employer-sponsored insurance covers about half of all Americans. Why does tying insurance to employment create problems? What happens when you lose your job?

Section C — Comparative systems

C1. Compare the UK NHS and the US system on three dimensions: (a) cost per capita, (b) access (who is covered), (c) wait times. Which system performs better on which dimension?

C2. "The Canadian system has long wait times." Is this true? What types of care have long waits? What types don't? Is the tradeoff (lower cost and universal coverage in exchange for longer waits) worth it?

C3. Singapore's system involves mandatory health savings accounts and substantial out-of-pocket costs. Apply the moral hazard framework: why does this design reduce overuse? What is the distributional concern?

C4. If you were designing a healthcare system for a country from scratch, which of the four models would you choose? Justify your choice.

C5. "No system is perfect" is the chapter's conclusion. But some systems are clearly better than others on most metrics. Which system would you argue is "best on balance"? What tradeoffs are you accepting?

Section D — Policy debates

D1. "Medicare for All would eliminate the administrative waste of the current system." Apply the comparative framework. Would it? What would the tradeoffs be?

D2. Drug prices in the U.S. are much higher than in other countries because the U.S. does not negotiate prices at the national level. The Inflation Reduction Act of 2022 allowed Medicare to negotiate prices for some drugs. Apply supply-and-demand and the elasticity framework. What should happen to prices? To innovation incentives?

D3. "Surprise billing" occurs when a patient receives care from an out-of-network provider they didn't choose (e.g., an anesthesiologist at an in-network hospital). The No Surprises Act of 2022 addressed this. Use the information asymmetry framework to explain why surprise billing exists and why market solutions alone couldn't fix it.

D4. Should the U.S. adopt a public option (a government-run insurance plan available alongside private insurance)? Apply the adverse selection framework: what would happen to private insurance pools if a public option were available?

Section E — COVID and healthcare

E1. The COVID pandemic revealed both strengths and weaknesses of the U.S. healthcare system. List two strengths and two weaknesses that the pandemic exposed.

E2. Vaccination is a positive externality (Chapter 11). Apply the externality framework to argue for or against mandatory vaccination during a pandemic.

E3. COVID hospitalizations cost $40,000–$80,000 per admission. Many patients faced large bills even with insurance. Apply the moral hazard and information asymmetry frameworks: did patients "choose" to be hospitalized? Does it make sense to charge them as if they did?

Section F — Data lookup

F1. Look up U.S. healthcare spending as a percentage of GDP on FRED or CMS.gov (the Centers for Medicare & Medicaid Services website). Plot the trend since 1960. When did the U.S. begin to diverge from other rich countries?

F2. Look up life expectancy at birth for the U.S. and three other countries on the World Bank's data portal. How does the U.S. compare? Has the gap been widening or narrowing?

F3. Look up the percentage of Americans without health insurance over time (Census Bureau or FRED). What happened after the ACA took effect in 2014?

Section G — Policy debate

G1. "Healthcare is a right, not a privilege." Evaluate from each of the three philosophical frameworks in Chapter 13 (utilitarian, Rawlsian, libertarian). Which framework supports this claim most strongly?

G2. "The U.S. leads the world in medical innovation. If we adopted single-payer, innovation would decline." Evaluate. Is the claim about innovation correct? What is the evidence? Is the causal claim about single-payer plausible?

G3. "We should let the market work in healthcare — remove regulations, increase transparency, and let competition drive down prices." Apply the three market failures from §14.1. Where would this approach work? Where would it fail?

Section H — Reflection

• Have you or someone you know ever experienced one of the three market failures in healthcare (information asymmetry, moral hazard, adverse selection)?
• After reading this chapter, has your view of the U.S. healthcare system changed?
• Which of the four healthcare systems do you find most appealing? What tradeoffs are you willing to accept?

Selected answers in appendices/answers-to-selected.md.