Health Technology Assessment with Diminishing Returns to Health: The Generalized Risk-Adjusted Cost-Effectiveness (GRACE) Approach


Objectives: Cost-effectiveness analysis (CEA) embeds an assumption at odds with most economic analysis-that of constant returns to health in the creation of happiness (utility). We aim to reconcile it with the bulk of economic theory.

Methods: We generalize the traditional CEA approach, allow diminishing returns to health, and align CEA with the rest of the health economics literature.

Results: This simple change has far-reaching implications for the practice of CEA. First, optimal cost-effectiveness thresholds should systematically rise for more severe diseases and fall for milder ones. We provide formulae for estimating how these thresholds vary with health-related quality of life (QoL) in the sick state. Practitioners can also use our approach to account for treatment outcome uncertainty. Holding average benefits fixed, risk-averse consumers value interventions more when they reduce outcome uncertainty (‘insurance value’) and/or when they provide a chance at positively skewed outcomes (‘value of hope’). Finally, we provide a coherent way to combine improvements in QoL and life expectancy (LE) when people have diminishing returns to QoL.

Conclusion: This new approach obviates the need for increasingly prevalent and ad hoc exceptions to CEA for end-of-life care, rare disease, and very severe disease (eg, cancer). Our methods also show that the value of improving QoL for disabled people is greater than for comparable non-disabled people, thus resolving an ongoing and mathematically legitimate objection to CEA raised by advocates for disabled people. Our Generalized Risk-Adjusted Cost-Effectiveness (GRACE) approach helps align HTA practice with realistic preferences for health and risk.

The full study can be viewed at Value in Health.

Lakdawalla, D. N., & Phelps, C. E. (2021). Health technology assessment with diminishing returns to health: the Generalized Risk-Adjusted Cost-Effectiveness (GRACE) approach. Value in Health24(2), 244-249.

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