Methods to Adjust Willingness to Pay (WTP) Measures for Severity of Illness



Both private sector organizations and governmental health agencies increasingly use illness severity measures to adjust willingness-to-pay thresholds. Three widely discussed methods—absolute shortfall (AS), proportional shortfall (PS), and fair innings (FI)—all use ad hoc adjustments to cost-effectiveness analysis methods and “stair-step” brackets to link illness severity with willingness-to-pay adjustments. We assess how these methods compare with microeconomic expected utility theory-based methods to value health gains.


We describe standard cost-effectiveness analysis methods, the basis from which AS, PS, and FI make severity adjustments. We then develop how the Generalized Risk Adjusted Cost Effectiveness (GRACE) model assesses value for differing illness and disability severity. We compare AS, PS, and FI against value as defined by GRACE.


AS, PS, and FI have major and unresolved differences between them in how they value various medical interventions. Compared with GRACE, they fail to properly incorporate illness severity or disability. They conflate gains in health-related quality of life and life expectancy incorrectly and confuse the magnitude of treatment gains with value per quality-adjusted life-year. Stair-step methods also introduce important ethical concerns.


AS, PS, and FI disagree with each other in major ways, demonstrating that at most, one correctly describes patients’ preferences. GRACE offers a coherent alternative, based on neoclassical expected utility microeconomic theory, and can be readily implemented in future analyses. Other approaches that depend on ad hoc ethical statements have yet to be justified using sound axiomatic approaches.

The full study can be viewed at Value in Health.

Phelps, & Lakdawalla, D. N. (2023). Methods to Adjust Willingness-to-Pay Measures for Severity of Illness. Value in Health.

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