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

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  • Darius N. Lakdawalla

    (University of Southern California
    The National Bureau of Economic Research (NBER))

  • Charles E. Phelps

    (University of Rochester
    University of Rochester)

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.

Suggested Citation

  • Darius N. Lakdawalla & Charles E. Phelps, 2022. "A guide to extending and implementing generalized risk-adjusted cost-effectiveness (GRACE)," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 23(3), pages 433-451, April.
    • Handle: RePEc:spr:eujhec:v:23:y:2022:i:3:d:10.1007_s10198-021-01367-0
    DOI: 10.1007/s10198-021-01367-0
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    References listed on IDEAS

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    Cited by:

    1. Mulligan, Karen & Baid, Drishti & Doctor, Jason N. & Phelps, Charles E. & Lakdawalla, Darius N., 2024. "Risk preferences over health: Empirical estimates and implications for medical decision-making," Journal of Health Economics, Elsevier, vol. 94(C).

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