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Health Care Economics, 7th Edition solutions manual and test bank by Paul J. Feldstein

Health Care Economics, 7th Edition solutions manual and test bank by Paul J. Feldstein

Instructor’s Manual to Accompany
Health Care Economics
Paul J. Feldstein


ttle) of medical care as they desire and can aff ord. For those
who cannot afford to buy as much medical care as society
believes they should have, society also makes a value judg-
ment as to the size of the subsidy they should receive and the
method of providing that subsidy. Federal medical assistance
to diff erent population groups started at the federal level in
the 1960s with the enactment of Medicare and Medicaid.
How to allow for growth and innovation?
Determinations for growth and adoption of innovation can be
achieved under diff erent approaches. One approach, relied
upon in the United States, is to allow technology to develop
based on the profi t motive. If a producer can innovate and
purchasers believe that innovation is sufficiently valuable
that they are willing to pay for an improved product, then
the developer of that innovation will make money. Implicit
in this approach is that purchasers can spend their funds to
have access to that technology. An alternative approach is to
have government decide what technologies should be made
available to the population. The government’s judgment of
the value of the innovation is substituted for that of the pur-
chaser. This country has relied upon the fi rst approach for
technology development and the adoption of technology,
with the government monitoring the safety of those innova-
tions, as when the FDA provides approval for new prescrip-
tion drugs and medical devices before they can be marketed.
In other countries where the government pays for medical
services, the government determines whether or not they
will pay for new technologies. Government decision-making
is likely to place a greater emphasis on cost-reducing tech-
nologies rather than benefi t increasing ones.
2. What are the two basic tools of economics? Give an
example of each with respect to health, medical services, and
The two basic tools of economics are optimization tech-
niques, which are based on marginal analysis, and supply and
demand analysis, which is used for predicting new equilib-
rium situations.
Marginal analysis (optimization techniques) requires
specifying the appropriate criteria to minimize cost or maxi-
mize output given resource constraints.
Application to health: government agencies can use mar-
ginal analysis to determine the most effi cient allocation of
medical and nonmedical inputs (considering each program’s
marginal benefi ts and marginal costs) to achieve an increase
in health status of a defi ned population.
1. Every economy, as well as the medical care sector, must
decide the following: what should be produced, how it
should be produced, how it should be distributed, and how
to allow for growth and innovation. With respect to the med-
ical care sector, how are these choices currently made? How
have they changed over time? What are the assumptions and
value judgments underlying each of these choices?
What should be produced?
Currently, the determination of output of medical services is
mainly based on the assumption of consumer sovereignty and
the use of price competition for producing the goods and ser-
vices desired by consumers. Consumer sovereignty assumes
that consumers know best what is in their interest as compared
to having their consumption of medical services determined
by producers or the government and that they have suffi-
cient information to make such decisions. Consumer behavior
refl ects their perception of the marginal benefi ts and the mar-
ginal costs of diff erent goods and services, so that marginal ben-
efi t per dollar spent (MB/P) will be equal for all commodities.
Consumer choices have changed over time as more information
on the benefi ts of medical care treatment has become available
and the prices of such services have been reduced as a result of
more comprehensive health insurance coverage.
How it should be produced?
Providers of medical services attempt to minimize the cost
of production by considering both the relative price of inputs
and the relative marginal productivity of these inputs. By
competing in the marketplace or facing a fixed, regulated
price set by government, providers have an incentive to be
effi cient and to respond to changing consumer demands. Pro-
ducers are assumed to have information and make rational
choices on benefi ts and costs of producing medical services.
In certain prior periods, standards or fi xed ratios of inputs,
such as the number of beds per thousand population, were
proposed; however, this approach was not widely accepted
and is generally no longer used.
How it should be distributed?
Decisions on how to distribute medical services depend on the
value judgment of society that consumers, rather than govern-
ment or health professionals, should determine the amount to
be spent on medical services. Under the concept of consumer
sovereignty, consumers should be able to buy as much (or as

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