Question 1

Which one of the following basic findings about for-profits is not true?

Accepted Answer

A)  For profits tend to respond quicker to any changes in the market situation. 
B)  For profits have lower costs, higher prices, and consequently greater profits. 
C)  For profits are often engaged in cream skimming. 
D)  For profits are often engaged in overcompensated activities like teaching and research. 
E)  For profits avoid patients who are sicker, poor, or uninsured. 
A)  For profits tend to respond quicker to any changes in the market situation. 
B)  For profits have lower costs, higher prices, and consequently greater profits. 
C)  For profits are often engaged in cream skimming. 
D)  For profits are often engaged in overcompensated activities like teaching and research. 
E)  For profits avoid patients who are sicker, poor, or uninsured. D

Question 2

What is the purpose of using an internal rate of return (IRR) for financial projections, if it can provide only an approximate estimate of any given project's profitability?

Accepted Answer

IRR can be calculated relatively quickly, and in the presence of multiple competing projects it can provide a quick rough estimate of each project's financial desirability. It facilitates the selection of just a handful of potentially worthwhile projects, which subsequently undergo a more detailed (and more time consuming) scrutiny to select the best one(s). Using IRR saves time and effort.

Question 3

Venture capitalists are entrepreneurs who specialize in high-risk investments. Often they are the only available source of financing for small startup biotech companies, which very rarely are able to obtain bank loans to finance their research.

Accepted Answer

A) True 
 B)False  True

Question 4

The basic difference between a partnership and a corporation is that in partnerships the company is controlled/managed by its owners, while in corporations ownership is separated from management. It means that in case of bankruptcy, owners (shareholders) of a corporation will be held responsible for the corporation's debt obligations, while owners of a partnership will have a limited liability for the company's debts and will face the risk of losing only company's assets, but not their personal assets.

Accepted Answer

A) True 
 B)False

Question 5

Since no one party owns a not-for-profit hospital, physicians really own the hospital's business.

Accepted Answer

A) True 
 B)False

Question 6

"When the economy goes up, it floats all boats, when the economy goes down, it sinks all ships." Please explain why this is not true for the boat we are studying called the health care industry. Point out at least some areas in which it is true.

Accepted Answer

Consider the hospital industry. For the

Question 7

Which of the following statements is false?
Not-for-profit hospitals differ from traditional corporations in that

Accepted Answer

A)  a hospital may raise money for a capital building project from charitable social events. 
B)  a hospital may raise money from charitable organizations to fund every day operating shortfalls. 
C)  a hospital may have a large endowment from previous benefactors. 
D)  a hospital is expected to provide a small, but significant portion of its services to patients who are unwilling or unable to pay for them. 
E)  a hospital is most often subject to systemic (correlated) risks, while a traditional corporation is mostly subject to independent (uncorrelated) risks. 
A)  a hospital may raise money for a capital building project from charitable social events. 
B)  a hospital may raise money from charitable organizations to fund every day operating shortfalls. 
C)  a hospital may have a large endowment from previous benefactors. 
D)  a hospital is expected to provide a small, but significant portion of its services to patients who are unwilling or unable to pay for them. 
E)  a hospital is most often subject to systemic (correlated) risks, while a traditional corporation is mostly subject to independent (uncorrelated) risks.

Question 8

What is the most important lesson learned from the story of the very first HMO in U.S. history: the Kaiser Health Plan?

Accepted Answer

The founders had brilliant innovative id

Question 9

Dr. Yuan opens a lab. The lab has an initial cost of $100,000. Expected net cash flow is $24,000 in the first year, growing by 15% per year. Net cash flow is revenue less expenses. Assume the lab has a 6 year life and there is no scrap value for the lab.
-Assume instead that Dr. Yuan forms a partnership with Dr. Bhat. They agree to share the $100,000 cost equally and to share the cash flow equally. Because of efficiency gains from longer operating hours, they expect the net cash flow to be $32,000 per year. Assume they expect net cash flow to grow at 15% per year. What is the consequence of the partnership to Dr. Yuan? Please compare the results to the original scenario described in question 13 (Dr. Yan opening the only lab in the area).

Accepted Answer

A)  The NPV decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment. 
B)  The NPV decreases, and becomes negative. Dr. Yuan should expect a loss on this investment. 
C)  The IRR decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment. 
D)  The IRR and the NPV increase. Dr. Yuan can still expect a positive return on her investment. 
E)  The IRR and the NPV decrease. Dr. Yuan should expect a negative return on her investment. 
A)  The NPV decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment. 
B)  The NPV decreases, and becomes negative. Dr. Yuan should expect a loss on this investment. 
C)  The IRR decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment. 
D)  The IRR and the NPV increase. Dr. Yuan can still expect a positive return on her investment. 
E)  The IRR and the NPV decrease. Dr. Yuan should expect a negative return on her investment.

Question 10

Research studies indicate that when a non-profit healthcare organization is converted to a for-profit status, it might lead to higher prices and a reduction in the number of services offered, if the converting organization had significant monopolistic market power in that geographical area.

Accepted Answer

A) True 
 B)False

Question 11

When Allegheny Hospital System (AHERF) went bankrupt, the price of borrowing for all hospitals increased. This is an example of correlated system risk.

Accepted Answer

A) True 
 B)False

Question 12

Explain how not-for-profit hospitals financing methods differ from traditional firms.

Accepted Answer

A significant portion of not-for-profit

Question 13

Dr. Yuan opens a lab. The lab has an initial cost of $100,000. Expected net cash flow is $24,000 in the first year, growing by 15% per year. Net cash flow is revenue less expenses. Assume the lab has a 6 year life and there is no scrap value for the lab.
-If the time discount rate is 8%, what is the NPV of the lab? What is its IRR?

Accepted Answer

A)  The NPV is $41,976; the IRR is 6.0%. 
B)  The NPV is $31,740; the IRR is 6.0%. 
C)  The NPV is $26,479; the IRR is 16.7%. 
D)  The NPV is $28,568; the IRR is 8.0%. 
E)  The NPV is $27,600; the IRR is 8.0%. 
A)  The NPV is $41,976; the IRR is 6.0%. 
B)  The NPV is $31,740; the IRR is 6.0%. 
C)  The NPV is $26,479; the IRR is 16.7%. 
D)  The NPV is $28,568; the IRR is 8.0%. 
E)  The NPV is $27,600; the IRR is 8.0%.

Question 14

Dr. Chey works in a small group practice. If Dr. Chey dies, and the practice is owned by a for-profit hospital corporation,

Accepted Answer

A)  replacing Dr. Chey will most likely be more burdensome than adding another partner to a traditional practice. 
B)  tying up Dr. Chey's legal ties to the practice will probably be uncomplicated since Dr. Chey was essentially an employee of a corporation. 
C)  tying up Dr. Chey's legal ties to the practice will probably be complicated since Dr. Chey was essentially an employee of a corporation. 
D)  legal proceedings related to Dr. Chey's ownership interest in the firm will probably go on for years. 
E)  his children will inherit Dr. Chey's ownership interest in the firm. 
A)  replacing Dr. Chey will most likely be more burdensome than adding another partner to a traditional practice. 
B)  tying up Dr. Chey's legal ties to the practice will probably be uncomplicated since Dr. Chey was essentially an employee of a corporation. 
C)  tying up Dr. Chey's legal ties to the practice will probably be complicated since Dr. Chey was essentially an employee of a corporation. 
D)  legal proceedings related to Dr. Chey's ownership interest in the firm will probably go on for years. 
E)  his children will inherit Dr. Chey's ownership interest in the firm.

Question 15

Dr. Yuan opens a lab. The lab has an initial cost of $100,000. Expected net cash flow is $24,000 in the first year, growing by 15% per year. Net cash flow is revenue less expenses. Assume the lab has a 6 year life and there is no scrap value for the lab.
-Assume instead that Dr. Yuan forms a partnership with Dr. Bhat. They agree to share the $100,000 cost equally and to share the cash flow equally. Because of efficiency gains from longer operating hours, they expect the cash flow to be $32,000 per year. Now assume they expect net cash flow to grow only at 10% per year. Please compare the results to the original scenario described in question 13 (Dr. Yan opening the only lab in the area).

Accepted Answer

A)  The NPV decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment. 
B)  The NPV decreases, and becomes negative. Dr. Yuan should expect a loss on this investment. 
C)  The IRR decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment. 
D)  The IRR and the NPV increase. Dr. Yuan can expect a positive return on her investment. 
E)  The IRR and the NPV decrease. Dr. Yuan should expect a negative return on her investment. 
A)  The NPV decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment. 
B)  The NPV decreases, and becomes negative. Dr. Yuan should expect a loss on this investment. 
C)  The IRR decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment. 
D)  The IRR and the NPV increase. Dr. Yuan can expect a positive return on her investment. 
E)  The IRR and the NPV decrease. Dr. Yuan should expect a negative return on her investment.

Question 16

The major reason for the demise of the Allegheny General Hospital group was the fact that its shareholders violated the shareholder/investor agency relationship when illegal accounting practices were discovered in the late 1990s.

Accepted Answer

A) True 
 B)False

Question 17

One of the most important things an HMO should do to stay profitable is to make sure
a) the medical costs' rate of growth is below the rate of growth of premiums (revenues), and
b) customer satisfaction does not slip.

Accepted Answer

A) True 
 B)False

Question 18

Use the following equation to explain why a nursing home will have a higher business risk than a pharmaceutical company. Compare a hospital with a pharmaceutical company to determine which one has the higher business risk.
Business risk = (Revenue Risk) x (Operating Expense) x (Financial Leverage)

Accepted Answer

? For Nursing Home Business Risk versus

Question 19

Dr. Yuan opens a lab. The lab has an initial cost of $100,000. Expected net cash flow is $24,000 in the first year, growing by 15% per year. Net cash flow is revenue less expenses. Assume the lab has a 6 year life and there is no scrap value for the lab.
-Later that same year, Dr. Bhat opens a similar lab in the strip mall less than two miles away from Dr. Yuan. Dr. Yuan estimates her net cash flow in the first year will be considerably less than her initial estimate. She estimates it will be $16,000. All else equal, what happens to the NPV of Dr. Yuan's lab?

Accepted Answer

A)  The NPV decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment. 
B)  The IRR decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment. 
C)  The IRR decreases, and becomes negative. Dr. Yuan should expect a loss on this investment. 
D)  The IRR and the NPV decrease. Dr. Yuan can still expect a positive return on her investment. 
E)  The IRR and the NPV decrease. Dr. Yuan should expect a negative return on her investment. 
A)  The NPV decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment. 
B)  The IRR decreases, but is still positive. Dr. Yuan can still expect a positive return on her investment. 
C)  The IRR decreases, and becomes negative. Dr. Yuan should expect a loss on this investment. 
D)  The IRR and the NPV decrease. Dr. Yuan can still expect a positive return on her investment. 
E)  The IRR and the NPV decrease. Dr. Yuan should expect a negative return on her investment.

Question 20

Joe is considering his options. This summer he will graduate with a B.S. degree in actuarial science and he can begin working this year. His other option is to apply to a medical school to pursue the physician assistant degree. The degree will cost $80,000 in tuition, will take 2 years to complete, and will result in an increase in his annual earnings by about $10,000 per year. Dividing the gain by the cost results in

Accepted Answer

A)  a positive return, so Joe should apply to medical school. 
B)  a negative return, so Joe should stick with actuarial science career. 
C)  a negative return, but does not account for the opportunity cost of Joe's additional time in school and the uncertainty, time and effort involved in completing the application process and school. 
D)  a positive approximate return, but to get a more precise estimate Joe should also consider adding the following costs to the cost side of the equation: the opportunity cost of additional time in school and the uncertainty, time and effort involved in completing the application process and degree requirements. 
E)  a positive approximate return, but to get a more precise estimate Joe should also consider adding the opportunity cost of Joe's additional time in school and the uncertainty, time and effort involved in completing the application process and degree requirements to the cost side of the equation, while adding the value of the satisfaction Joe expects to receive from choosing a medical career (over the actuarial career) to the gain side of the equation. 
A)  a positive return, so Joe should apply to medical school. 
B)  a negative return, so Joe should stick with actuarial science career. 
C)  a negative return, but does not account for the opportunity cost of Joe's additional time in school and the uncertainty, time and effort involved in completing the application process and school. 
D)  a positive approximate return, but to get a more precise estimate Joe should also consider adding the following costs to the cost side of the equation: the opportunity cost of additional time in school and the uncertainty, time and effort involved in completing the application process and degree requirements. 
E)  a positive approximate return, but to get a more precise estimate Joe should also consider adding the opportunity cost of Joe's additional time in school and the uncertainty, time and effort involved in completing the application process and degree requirements to the cost side of the equation, while adding the value of the satisfaction Joe expects to receive from choosing a medical career (over the actuarial career) to the gain side of the equation.

Which one of the following basic findings about for-profits is not true?

What is the purpose of using an internal rate of return (IRR) for financial projections, if it can provide only an approximate estimate of any given project's profitability?

Venture capitalists are entrepreneurs who specialize in high-risk investments. Often they are the only available source of financing for small startup biotech companies, which very rarely are able to obtain bank loans to finance their research.

Since no one party owns a not-for-profit hospital, physicians really own the hospital's business.

"When the economy goes up, it floats all boats, when the economy goes down, it sinks all ships." Please explain why this is not true for the boat we are studying called the health care industry. Point out at least some areas in which it is true.

Which of the following statements is false? Not-for-profit hospitals differ from traditional corporations in that

What is the most important lesson learned from the story of the very first HMO in U.S. history: the Kaiser Health Plan?

Research studies indicate that when a non-profit healthcare organization is converted to a for-profit status, it might lead to higher prices and a reduction in the number of services offered, if the converting organization had significant monopolistic market power in that geographical area.

When Allegheny Hospital System (AHERF) went bankrupt, the price of borrowing for all hospitals increased. This is an example of correlated system risk.

Explain how not-for-profit hospitals financing methods differ from traditional firms.

Dr. Chey works in a small group practice. If Dr. Chey dies, and the practice is owned by a for-profit hospital corporation,

The major reason for the demise of the Allegheny General Hospital group was the fact that its shareholders violated the shareholder/investor agency relationship when illegal accounting practices were discovered in the late 1990s.

One of the most important things an HMO should do to stay profitable is to make sure a) the medical costs' rate of growth is below the rate of growth of premiums (revenues), and b) customer satisfaction does not slip.

Use the following equation to explain why a nursing home will have a higher business risk than a pharmaceutical company. Compare a hospital with a pharmaceutical company to determine which one has the higher business risk. Business risk = (Revenue Risk) x (Operating Expense) x (Financial Leverage)

Choices: Money, Medicine, and Health

Demand and Supply

Cost-Benefit and Cost-Effectiveness Analysis

Health Insurance: Financing Medical Care

Insurance Contracts and Managed Care

Physicians

Medical Education, Organization, and Business Practices

Hospitals

Management and Regulations of Hospital Costs

Long-Term Care

Pharmaceuticals

Macroeconomics and Medical Care

The Role of Government and Public Goods

History, Demography, and the Growth of Modern Medicine

International Comparisons of Health and Health Expenditures

Economic Evaluation of Health Policy: The Patient Protection and Affordable Care Act of 2010

Value for Money in the Future of Health Care

Filters

Exam 12: Financing and Ownership of Health Care Providers

Which one of the following basic findings about for-profits is not true?

What is the purpose of using an internal rate of return (IRR) for financial projections, if it can provide only an approximate estimate of any given project's profitability?

Venture capitalists are entrepreneurs who specialize in high-risk investments. Often they are the only available source of financing for small startup biotech companies, which very rarely are able to obtain bank loans to finance their research.

Since no one party owns a not-for-profit hospital, physicians really own the hospital's business.

"When the economy goes up, it floats all boats, when the economy goes down, it sinks all ships." Please explain why this is not true for the boat we are studying called the health care industry. Point out at least some areas in which it is true.

Which of the following statements is false? Not-for-profit hospitals differ from traditional corporations in that

What is the most important lesson learned from the story of the very first HMO in U.S. history: the Kaiser Health Plan?

Research studies indicate that when a non-profit healthcare organization is converted to a for-profit status, it might lead to higher prices and a reduction in the number of services offered, if the converting organization had significant monopolistic market power in that geographical area.

When Allegheny Hospital System (AHERF) went bankrupt, the price of borrowing for all hospitals increased. This is an example of correlated system risk.

Explain how not-for-profit hospitals financing methods differ from traditional firms.

Dr. Chey works in a small group practice. If Dr. Chey dies, and the practice is owned by a for-profit hospital corporation,

The major reason for the demise of the Allegheny General Hospital group was the fact that its shareholders violated the shareholder/investor agency relationship when illegal accounting practices were discovered in the late 1990s.

One of the most important things an HMO should do to stay profitable is to make sure a) the medical costs' rate of growth is below the rate of growth of premiums (revenues), and b) customer satisfaction does not slip.

Use the following equation to explain why a nursing home will have a higher business risk than a pharmaceutical company. Compare a hospital with a pharmaceutical company to determine which one has the higher business risk. Business risk = (Revenue Risk) x (Operating Expense) x (Financial Leverage)

Choices: Money, Medicine, and Health

Demand and Supply

Cost-Benefit and Cost-Effectiveness Analysis

Health Insurance: Financing Medical Care

Insurance Contracts and Managed Care

Physicians

Medical Education, Organization, and Business Practices

Hospitals

Management and Regulations of Hospital Costs

Long-Term Care

Pharmaceuticals

Macroeconomics and Medical Care

The Role of Government and Public Goods

History, Demography, and the Growth of Modern Medicine

International Comparisons of Health and Health Expenditures

Economic Evaluation of Health Policy: The Patient Protection and Affordable Care Act of 2010

Value for Money in the Future of Health Care

Filters