Economic Modeling Review

Jocelyn Desmarais Goldblatt

ABSTRACT
An examination of models used to inform health reform in the United
States. For this paper I examined the technical appendix or
methodology paper associated with six major microsimulations used to
inform the passage of the Patient Protection and Affordable Care Act
(PPACA) and to predict the effects of implementing the acts provisions.
See Table 1 for a list of specific models. I focus on models used to
address access with an eye toward possible uses of improved models
and simulations to address quality.

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Introduction
It is hard to ignore that in 2006, the United States was number
one in terms of health care spending per capita but ranked 39th for
infant mortality, 43rd for adult female mortality, 42nd for adult male
mortality, and 36th for life expectancy. Health expenditures in the
United States neared $2.6 trillion in 2010, over ten times the $256
billion spent in 1980.

The rate of growth in recent years has slowed

relative to the late 1990s and early 2000s, but is still expected to grow
faster than national income over the foreseeable future.ii Since 2002,
employer-sponsored health coverage for family premiums have
increased by 97%, placing increasing cost burdens on employers and
workers.iii In total, health spending accounted for 17.9% of the nations
Gross Domestic Product (GDP) in 2010.iv Despite having the most
expensive health care system, the United States ranks last overall
compared to six other industrialized countriesAustralia, Canada,
Germany, the Netherlands, New Zealand, and the United Kingdomon
measures of health system performance in five areas: quality,
efficiency, access to care, equity and the ability to lead long, healthy,
productive lives.v These facts have fueled a question now being
discussed in academic circles, as well as by government and the
public: Why do we spend so much to get so little?vi

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Solutions to the health care crisis; succinctly described above,

focus on improving the triad of Cost, Quality, and Access. Major reform
efforts have culminated in the passage of The Patient Protection and
Affordable Care Act of 2010 (PPACA), which primarily addresses the
issue of access. Economic models and simulations that predicted
policy outcomes supported reform efforts. Quality is presently under
investigation and modeling may have a role to play in this segment of
reform.
Simulation modeling is becoming increasingly popular as a
format for understanding problems as well as designing and predicting
the effects of health care policy. The ability to model and simulate
policy changes to predict their effects with accuracy could help
effectively prioritize legislation. They say you dont know what you
dont know but perhaps understanding how models and simulations
are limited could help to focus research efforts by addressing those
limitations. Simulation models have been shown to provide
reasonably accurate estimates, with confidence bounds of ~30%.vii I
believe simulations could become an even more reliable tool in policy
analysis and design over time with improved economic paradigms and
standardized methods as collaboration among disciplines is enabled by
technology. The economic models that were used were limited to the
current neoclassical paradigm. As health economics and heterodox

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views emerge and are full of possibilities, modeling and simulation
remains tied to the neoclassical economic paradigms.

Model & Simulation Basic Structure

Models provide the framework for simulations that predict outcomes.
Microsimulations predict behaviors over time. The models I examined
all used the same basic methodology of defining a baseline model,
running a simulation with and without specific policies applied, then
comparing outcomes.

View
In order to achieve the desired view, the modeler will make certain
decisions about the parameters, data sources, behavioral assumptions
and outputs. View is not just a reflection of micro vs. macro, it is also
defined by what is considered endogenous and exogenous to the
model based on relevancy to desired outputs. Parameters are the
measurable factors used to define the system microsimulations use
the most discrete parameters. In most cases they are represented as
decision-making units or agents subject to behavioral assumptions
providers, payers (public and private), individuals or households, and
employers. Data source selection is based on available data and best
fit for the desired view as well. The data may not match the view

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being sought precisely; therefore, some manipulation takes place to

achieve the most accurate approximation.

Closed or Open
If a model is closed, the population at the start remains constant
throughout the simulation. If its open then the population changes as
agents enter and depart the system.

Static or dynamic
Dynamic means behaviors change over time in response to system
changes. In a static model, actors maintain the same behaviors over
time.

Outputs
Coverage, cost and economic impact are the main outputs in the
models I examined. Health, however, is not an output. Models used to
support quality efforts would need to include health status as an
output.

Models Examined
Purposes
I examined the methodology or technical documents for six major
microsimulations used to support the access improvement aspects of
health reform. I looked at one developed by the CBO to analyze an

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array of public policy options involving health insurance coverage in
2007.viii Also, COMPARE, developed by RAND in 2009 as a way of
projecting how households and firms would respond to health care
policy changes based on economic theory and existing evidence from
smaller changes.ix Jon Gruber of MIT developed GMSim in 2009 to
predict the effect of health market interventions on the movement of
people and dollars within the US healthcare system.x Lewin Group also
developed HBSM as a platform for analyzing the impact of health
reform proposals - created to provide comparisons of the impact of
alternative health reform models on coverage and expenditures for
employers, governments and households.xi CMS developed OHRM in
2011, a model that simulates the impact of health reform legislative
provisions on both household and employer decision-making in regard
to health insurance coverage and health spending. Finally, the Urban
Institute developed HIPSM in 2011, which estimates the cost and
coverage effects of proposed health care policy options.xii

Parameters, Data, & Variables

Populations
Each model represents the population using some combination of three
available sources: Current Population Survey Annual Social and
Economic Supplement (CPS-ASEC), survey of Income and Program

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Participation (SIPP), and Medical Expenditure Panel Survey Household

Component (MEPS-HC).

Employers
Employers are represented and defined using MEPS-HC, MEPS-IC (the
Insurance Component), or the Kaiser Family Foundation/HRET Employer
Health Benefits Survey.

Cost & Prices

Premium Prices
Medical Spending and Premium Prices are not treated as a behavioral
characteristic of agents but are instead estimated using three data
sources MEPS-HC, MEPS-IC and KFF/HRET. The microsimulations use
one of two methods to estimate baseline premiums for ESI.xiii Many
modelers simulate insurance premiums using information on health
care expenditures and applying an estimate of insurer loading costs. xiv
Loading cost calculations change over time and the details of those
changes are not studied or understood, although they are incorporated
into some of the models to determine the price of insurance offered
using averages. This is somewhat helped by the 80/20 or 85/15
provision of ACA provided no major loopholes emerge. Baseline
premium constructions for the microsimulation models are represented
in Table 2 (borrowed from Jean M. Abraham, Ph.D., University of
Minnesota). National Health Expenditure Accounts (NHEA) and MEPS

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are the most relied upon sources of data used to understand
expenditures. While this may be fine in the higher views,
microsimulations would be better served with information about
behaviors at a more discrete level.

Agents and behaviors

The patient-consumer, a key decision maker in these models, is
represented as an individual or a household. A central behavior
modeled is the take-up of insurance. Utility-based microsimulations
build on an economic framework of utility maximization - each agent
(decision making entity individual, household, firm etc.) compares all
available health insurance options and selects the option that best
serves them. Elasticity based microsimulations build on data collected
from household surveys and describes individual behaviors in terms of
the responsiveness of insurance participation to changes in the price of
coverage. Utility tends to be more discrete and less dependent on past
data but data are often adjusted in order to more closely match
currently accepted elasticity data. Which is better depends on the view
and desired outputs of the model.

Coverage
The effect of the coverage mandate is often predicted using data from
Massachusetts (97% compliance).

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Limitations
Accuracy
A review of history suggests, unsurprisingly, that modelers are most
accurate when estimating the effects of incremental reforms that affect
relatively small proportions of the population.xv Accuracy is essentially
determined by the modelers sense of validity or, likely, what is
perceived to be the audiences validity tolerance. In my conclusion, I
will point to possibilities for improving accuracy in the aggregate by
using standard methods of development and loosely coupled
component models.

Behavioral Assumptions
Behavioral assumptions may be the most limiting characteristic of
these models. The economic models that have been used to inform
solutions are limited in their ability to understand and express human
behaviors and evaluate social impacts.
Behaviors
In modeling, behaviors are represented as formulas or logic derived
from historical data combined with theories that assume rational
behaviorxvi - A major challenge facing effectivemathematical
modeling is to develop models that can take into account [agents']
capacity for self-modification according to internally constructed and

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defined goals. Basically, the assumptions required for tractable
mathematics steer models away from the most important aspects of
human behavior.xvii A deeper understanding of human behavior could
improve the use of the utilityxviii concept but it would need to solve the
problem of measuring value independent of price.
Value
Measuring the values inherent in transactions is a particularly difficult
problem for economists. Alfred Marshall (the father of neoclassical
economics) thought that "We might as reasonably dispute whether it is
the upper or the under blade of a pair of scissors that cuts a piece of
paper, as whether value is governed by utility or cost of production". xix
I think the problem in this statement is that value is not the outcome of
tension between cost of production and utility that is simply the
optimal price a producer can charge a consumer. It may seem
semantic, but the difference becomes clearer when we attempt to
improve quality in health care. What a person is willing and able to
pay only represents the dollar value to the producer or seller although
the price does reflect some aspect of value to the consumer. I think
including the degree to which the transaction improves an individuals
wellbeing provides a more complete picture of the value to the
consumer. Because people have different resources, how much they
are able to pay says little about how valuable a good or service is to

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that person in absolute terms. There is lost value in things that the
consumer needs but cannot afford. The value to society is the net
contribution to productivity and the improved wellbeing of others as a
result of the transaction. In other words, a single transaction has
different values to different agents throughout the system. For
example, the picture is incomplete if a model accounts for
uncompensated care (unemployed and uninsured individuals who seek
medical care for which they cannot pay) as a cost to the provider but,
not for the fact that health status and employment are bi-directionally
related and by not receiving care, the probability of employment and
ability to pay for future care declines. So, by providing effective care, a
provider still adds value to the individual, the system and potentially
saves itself the cost of future uncompensated care. If the goal of
economics is simply to improve the financial returns of producers then
neoclassical economic approach to defining value makes sense. But,
especially when the product is health status, the real value has other
dimensions to the individual, household, and society writ large.
Utilization
Utilization is a key component to understanding cost growth. The
relationship between coverage and utilization is a point of contention
among experts. Studies that provide evidence of this relationship are
limited primarily to the RAND Health Insurance Experiment from 1971

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and a few statistical analyses related to major changes in Medicare and
Medicaid.
One major limitation of the RAND HIE for the purposes of assessing
PPACA is that it did not include an uninsured group. Additionally, since
the completion of the RAND HIE, many changes have occurred that
could affect behaviors, for instance:

Direct to consumer advertising of pharmaceuticals were made

legal in 1985
Reimbursement models have changed more than once
Managed care has peaked and faded
Tax treatment of private payers has changed
The Mental Health Parity Act of 96 made psychiatric benefits

more prevalent
The Balanced Budget Act of 97 further changed Medicare

reimbursement
HIPPA, COBRA and CHIP
The rise of PPOs
Major hospital mergers
The Internet has become a more accessible source of information
(affecting the ability to maximize utility)

Applying policy changes effectively to agents in the 1971 regulatory

environment doesnt include several changes that may affect the way
those agents behave today. Many statistical methods of updating
consumer behavior have been used however, qualitative analysis of
individual perceptions of health insurance could lend a lot to the effort
to improve the effect of insurance plans on the quality of care.

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Utilization in microsimulations appears to be corrolated mainly to

coverage in a one-way positive direction. (As coverage rises,

utilization rises.) because the view is limited to insurance coverage and
the direct effects of PPACA related to coverage. Changing one persons
health coverage will change an individuals behavior; changing
everyones will also likely alter the demand facing providers and
perhaps affect choices throughout the health care system.xx
Provider behavior is not detailed into these models even though
reimbursement structure and patient volume are thought to influence
behavior and therefore utilization. The CBO estimates that a 10%
reduction in fees paid to physicians will induce a 2.8% increase in
service utilization in a 2007 background paper entitled Factors
Underlying the Growth in Medicares Spending for Physicians Services.
Physician behavior is not limited to response to reimbursement rates.
Defensive medicine is another behavior not included but,
commonly thought to influence utilization and therefore costs. Details
of the relationship between public and private reimbursement fees are
unclear and may have an impact on provider behavior. Provider
decisions to participate in various networks and their market power to
negotiate dollar conversion factors are not well understood or
represented. Finally, physicians may vary in their commitment to
patient outcomes based on other factors that would be important to
understand if we want to improve quality.

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Employer behaviors are modeled in terms of the decision of
employers to offer health insurance. This decision too can be looked at
in terms of elasticity of price or utility. There is very little research
about how employers make decisions regarding offers of health
insurance. There is some discussion about crowd out which is
considered by modelers in various ways. Some employers may be
driven by a belief that healthy employees are productive employees.
Proving or disproving this and quantifying it may be influential in
improving quality.
Private payer behavior in the new (post PPACA) environment is
almost a complete unknown and may limit the capabilities of these
models particularly at the state level. Concerns about crowd-out
cannot be reliably modeled, simulated or predicted without more
certainty about employer, provider, and patient-consumer behaviors.

Unknowns
There are non-price factors that remain unknown without some
comprehensive qualitative studies of all agents involved. Environment
is exogenous to these models. Education is not considered to be
variable but may play a prominent role in health status as indicated by
many studies.
Another potential future consideration lies in upcoming
immigration reforms impact on uncompensated care. Forecasts of the

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Medicare program substantially underestimated the cost per insured

person because the enormous change in coverage induced systemic
effects on health spending such as new investments in hospitals. This
effect may not apply the characteristics of the uninsured are
unknown - including and especially health status.
The effect of mental health and wellbeing on somatic health can
play a role in improving how we define quality.

The Future
Much expert attention is now focused on attempting to improve
quality of care; that is to say, outcomes and cost-effectiveness. The
predominant belief is that insurance reimbursement models have
unintentionally caused over-utilization of unnecessary care,
redundancies, and other inefficiencies. But, how to pay for outcomes is
difficult for the payer to conceptualize. In my opinion, the value of a
dollar spent is dependent on whose perspective you take and the
circumstances surrounding the transaction. Utility does not accurately
capture the depth of this reality at the individual level. Further, the
measure of economic success of any entity should not be limited soley
to the accumulation of wealth but should include quality of life and
social impact elements as well. Modeling to include a variety
perspectives is a future possibility. Complexity economics is the

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application of complexity science to the problems of economics. It
studies computer simulations to gain insight into economic dynamics,
and avoids the assumption that the economy is a system in
equilibrium.xxi There has been "little work on empirical techniques for
testing dispersed agent complexity models".xxii
The modeling process could be more transparent and
collaborative if given a common format and design principles. There
are software design concepts and principles that could be applied to
model design and development that might facilitate their maturation.
There may be ways for simulations to be linked to live data.
The accuracy of aggregating and projecting functions may
improve if modelers were to consider using major principles of open
source programming, and service oriented architecture using a
common modeling language for collaboration. Then they could work
on smaller, more discrete (read: more accurate) interoperable
(loosely coupled) pieces. Those more accurate pieces could then be
used in a larger, shared environment or copied to a separate
environment creating a flexible, sharable environment. Rapid, even
real-time, turn around may be possible. Imagine a library of agents and
behaviors and data sets and a visual interactive environment where
models can be built and simulations can be run using compounds of
other models.

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I think any economic model that uses aggregate consumer data

could be redesigned to take the input of actual people. It would be

quite interesting to compare projected outcomes to outcomes
produced by the participants. I would think it might be particularly
valuable in the limitations described of the Rand Health Insurance
Experiment. Consider conducting studies with people providing data
directly to the catalog. With more people working on a problem, more
creative solutions can be attained. Google, Mozilla, and Apple have
successfully used these methods. To improve data, the Maryland
Exchange could include opt-in surveys or other such information
gathering techniques. There are many opportunities that might be
worth exploring in collaboration with computer scientists and
qualitative researchers. The possibilities are only limited by
imagination.

Conclusions
These models have been useful despite the breadth of limitations
identified. A strong case can be made for further improving their
usefulness and reliability with focused research efforts, unified
methods and collaborative development. The opportunities to
reconsider economic paradigms in the process of addressing the
quality aspect of health reform are huge. Prometheus gave fire &
optimism to humans with fire, they could be optimistic; with

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optimism, they could use fire constructively, to improve the human
condition. 'Philanthropa'loving what it is to be humanwas
thought to be the key to and essence of civilization.

xxiii

I am

optimistic that we have the tools we need to achieve our potential and
improve the human condition models and simulations are among
those tools. New methods of evaluating the value of transactions are
required to effectively determine appropriate policy and market
conditions that optimize the health and well being of our citizens and
modeling has a role to play in that process. All agents have valuable
insights and information and all perspectives are relevant. Modeling to
reveal the interrelationship between the micro and the macro; the
various agents; and the economic and social impacts are possibilities
worth pursuing as we attempt to improve the health of our citizens.

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Table 1

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Table 2
Table 2. Model Comparison: Baseline Premium Construction
ESI Premium Construction Non-Group Premium
Construction
CBO

GMSIM
(Gruber)

COMPARE
(RAND)

HBSM
(Lewin)

Expected aggregate spending of a firms

workers
Actuarial values assigned based on firm size,
income, health status
9% to 27% loading fee applied depending on
firm size
Incorporates state-specific information

Factor-based approach using

information on age, sex,
health, experience, and state
29% loading fee applied
Includes state-specific
information/adjustments

_Individual-level cost index (age/sex/health

rating) averaged over synthetic firm; index
aligned to employer premium distribution to
assign premium to firm
_Actuarial value assigned based on income
and firm size
_Loading fee implicit in premium
_Adjusted for state variation in premiums

_Age-health status spending

distribution from MEPS applied
to CPS
_Loading fee applied with
fixed (15%) and variable
components; varying load
component equal to 30% of
average unloaded non-group
cost, based on age interval
_Includes state-specific
information/adjustments

_Firm-specific premiums based on

experience-rated and community-rated
estimates (former use predicted spending of
workers and dependents, while the latter use 12
pools based on 4 census regions by 3 firm sizes)
_Actuarial values assigned based on firm size
_8.3% to 20% loading fee applied depending
on firm size
_No detailed information available about
incorporation of state-specific information

_Age-health status risk pools

to estimate spending from
MEPS-HC for those reporting
individual coverage
_Loading fee applied (details
not available)
_Includes state-specific
information/ adjustments
(approximated)

_Use expenditures of workers and apply

rating practices (e.g., small group market) to
estimate premiums; premiums also estimated
for self-funded plans
_Actuarial values assigned based on
comparison of employer plan to standard
benefits
_5.5% to 40% loading fee applied depending
on firm size
_State code imputed to MEPS and state
small-group rating rules applied

_Predicted spending and

rating practices (age, sex,
health status)
_40% loading fee applied
_Includes state-specific
information/adjustments

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HIPSM
(Urban
Institute)

_Built from risk pools from underlying health

care costs; blend of actual and expected costs
_Actuarial value assigned based on firm size
_Loading fee applied depending on industry
and firm size
_Accounts for state variation in spending

_Predicted spending among

those in non-group market;
model based on age sex,
health status, and typical
rating rules
_Loading fee applied (details
not available)
_Includes state-specific
information/adjustments

i Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, National
Health Care Expenditures Data, January 2012.
ii Robert Wood Johnson Foundation, High and rising health care costs: Demystifying U.S. health care
spending, October 2008.
iii Kaiser Family Foundation and Health Research and Educational Trust. Employer Health Benefits 2012
Annual Survey. September 2012.
iv Martin, A.B. et al. January 2012. Growth in US health spending remained slow in 2010; Health share of
gross domestic product was unchanged from 2009. Health Affairs 31(1): 208-219.
v http://www.commonwealthfund.org/News/News-Releases/2010/Jun/US-Ranks-Last-Among-SevenCountries.aspx
vi This article (10.1056/NEJMp0910064) was published on January 6, 2010, at NEJM.org.
http://www.nejm.org/doi/full/10.1056/NEJMp0910064
vii Glied, Sherry and Tilipman, Nicholas 2012. Simulation Modeling of Health Care Policy Department of
Health Policy and Management, Mailman School of Public Health, Columbia University, New York, New York
10032.
viii CBO October 2007 Health Insurance Simulation Model: A Technical Description

ix RAND Corporation 2006. The Health Insurance Experiment A Classic RAND Study Speaks to the Current
Health Care Reform Debate
x Gruber, Jonathan Microsimulation Estimates of the Effects of Tax Subsidies for Health Insurance
Massachusetts Institute of Technology, National Tax JournalVol. Llll, No. 3, Part 1

xi The Lewin Group 2009. The Health Benefits Simulation Model (HBSM): Methodology and Assumptions
xii Blumberg, Linda J. Shen, Yu-Chu Nichols, Len M. Buettgens, Matthew Dubay, Lisa C. McMorrow, Stacey
2003. The Health Insurance Reform Simulation Model (HIRSM): Methodological Detail and Prototypical
Simulation Results
xiii Abraham, Jean M. March 2012. Predicting the Effects of the Affordable Care Act: A Comparative Analysis
of Health Policy Microsimulation Models from the State Health Reform Assistance Network.
xiv Glied, Sherry and Tilipman, Nicholas 2012. Simulation Modeling of Health Care Policy Department of
Health Policy and Management, Mailman School of Public Health, Columbia University, New York, New York
10032.
xv Zabinski D, Selden T, Moeller J, Banthin J. 1999. Medical savings accounts: microsimulation results from a
model with adverse selection. J. Health Econ
xvi Rational choice theory, also known as choice theory or rational action theory, is a framework for
understanding and often formally modeling social and economic behavior. Rationality, interpreted as
"wanting more rather than less of a good", is widely used as an assumption of the behavior of individuals in
microeconomic models and analysis and appears in almost all economics textbook treatments of human
decision-making. It is also central to some of modern political science, sociology, and philosophy. It attaches
"wanting more" to instrumental rationality, which involves seeking the most cost-effective means to achieve
a specific goal without reflecting on the worthiness of that goal. http://en.wikipedia.org/wiki/Rational_choice_theory

xvii http://www.pnas.org/content/99/suppl.3/7288.short
xviii In economics, utility is a representation of preferences over some set of goods and services.
Preferences have a utility representation so long as they are transitive, complete, and continuous. Utility is
usually applied by economists in such constructs as the indifference curve, which plot the combination of
commodities that an individual or a society would accept to maintain a given level of satisfaction. Individual
utility and social utility can be construed as the value of a utility function and a social welfare function
respectively. When coupled with production or commodity constraints, under some assumptions, these
functions can be used to analyze Pareto efficiency, such as illustrated by Edgeworth boxes in contract curves.
Such efficiency is a central concept in welfare economics. http://en.wikipedia.org/wiki/Utility#Utility_as_probability_of_success
xix Marshall, Alfred Principles of Economics (1890)

xx Remler DK, Zivin JG, Glied SA. 2004. Modeling health insurance expansions: effects of alternate
approaches. J. Policy Anal. Manag.
xxi http://en.wikipedia.org/wiki/Complexity_economics

xxii Rosser, J. Barkley, Jr. "On the Complexities of Complex Economic Dynamics" Journal of Economic
Perspectives, V. 13, N. 4 (Fall 1999): 169-192.
xxiii http://nvs.sagepub.com/content/39/3/385