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Health technology assessment with risk aversion in health

Darius Lakdawalla and Charles E. Phelps

Journal of Health Economics, 2020, vol. 72, issue C

Abstract: Standard cost-effectiveness models compare incremental cost increases to incremental average gains in health, commonly expressed in Quality-Adjusted Life Years (QALYs). Our research generalizes earlier models in several ways. We introduce risk aversion in Quality of Life (QoL), which leads to “willingness-to-pay” thresholds that rise with illness severity, potentially by an order of magnitude. Unlike traditional CEA analyses, which discriminate against persons with disabilities, our analysis implies that the marginal value of improving QoL rises for disabled individuals. Our model can also value the uncertain benefits of medical interventions by employing well-established analytic methods from finance. Finally, we show that traditional QALYs no longer serve as a single index of health, when consumers are risk-averse. To address this problem, we derive a generalized single-index of health outcomes—the Generalized Risk-Adjusted QALY (GRA-QALY). Earlier models of CEA that abstract from risk-aversion nest as special cases of our more general model.

Keywords: Cost-effectiveness; Health technology assessment; Risk and uncertainty; Quality-Adjusted life-year (search for similar items in EconPapers)
JEL-codes: I1 I13 I18 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jhealeco.2020.102346

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