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A guide to extending and implementing generalized risk-adjusted cost-effectiveness (GRACE)

Darius Lakdawalla and Charles E. Phelps ()
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Charles E. Phelps: University of Rochester

The European Journal of Health Economics, 2022, vol. 23, issue 3, No 5, 433-451

Abstract: Abstract The generalized risk-adjusted cost-effectiveness (GRACE) model generalizes conventional cost-effectiveness analysis (CEA) by introducing diminishing returns to Health-Related Quality of Life (QoL). This changes CEA practice in three ways: (1) Willingness to pay (WTP) increases exponentially with untreated illness severity or pre-existing permanent disability, and WTP ends up lower for mild diseases but higher for severe diseases compared with conventional CEA; (2) Average treatment effectiveness should be adjusted for uncertainty in outcomes; and (3) The marginal rate of substitution between life expectancy and QoL varies with health state. Implementing GRACE requires new parameters describing risk preferences over QoL, the marginal rate of substitution between life expectancy (LE) and QoL, and the variance and skewness of treatment outcomes distributions. In this paper, we provide: (1) a generalized WTP threshold incorporating the possibility of permanent disability; (2) a simpler method to estimate the tradeoff rate between QoL and LE, eliminating the need to carry out treatment-by-treatment estimates; (3) a more-general method to adjust WTP for illness severity that permits non-constant relative risk-aversion in QoL; (4) a new approach to estimating risk-preferences over QoL, leveraging established empirical methods from “happiness” economics; and (5) a step-by-step guide for practitioners wishing to implement multi-period GRACE analyses.

Keywords: Quality of life; Life expectancy; Health insurance; Public health insurance; Cost-effectiveness analysis (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10198-021-01367-0

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