Methodology

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Journal homepage: www.elsevier.com/locate/jval

Health Technology Assessment With Diminishing Returns to Health: The

Generalized Risk-Adjusted Cost-Effectiveness (GRACE) Approach
Darius N. Lakdawalla, PhD, Charles E. Phelps, PhD

A B S T R A C T

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.

Keywords: CEA for disabled persons, value of hope, value of insurance, optimal CE decision threshold, severity of illness.

VALUE HEALTH. 2021; 24(2):244–249

Introduction
Cost-effectiveness analysis (CEA) is widely used to evaluate
new medical technologies—for example, by the UK’s National
Institute for Health and Care Excellence or by the Institute for
Clinical and Economic Review. Standard methods calculate the
average increase in treatment cost per average quality-adjusted
life-year (QALY) gained, also known as the incremental cost-
effectiveness ratio (ICER). In this standard approach, an inter-
DCosts
vention improves economic welfare if ICERhDQALYS , K, where K is
the cost-per-QALY decision threshold adopted by the decision-
making authority.
Existing theory implies that decision thresholds should not
vary with disease.1 The Institute for Clinical and Economic Review
recommends using a range of thresholds, now set from $50 000 to
$200 000 per QALY, depending on disease characteristics.2 The
National Institute for Health and Care Excellence uses an official
threshold of K = ₤20 000 to ₤30 000 per QALY, perhaps opera-
tionally going as low as ₤13 000 per QALY.3 However, the National
Institute for Health and Care Excellence regularly makes excep-
tions for rare diseases (up to ₤300 000, based on the extent of
health improvement) and end-of-life care (up to ₤50 000) and in
2011 established a separate “cancer fund” for new cancer drugs,
most of which did not meet the required ₤30 000/QALY limit.4
In parallel, researchers have raised concern that traditional CEA
discriminates against the severely ill or disabled.5,6 The U.S.
Affordable Care Act forbids using CEA that discriminates against
persons with disabilities, both by the Patient-Centered Outcomes
Research Institute and in determining Medicare coverage and
reimbursement. To address this concern, the Institute for Clinical
and Economic Review now calculates the equal value of life-years
gained in parallel with standard CEA analyses,7 and other de-
partures from CEA have been proposed as ad hoc ways to repair
this problem.6
These exceptions, exclusions, and prohibitions call for deeper
examination of CEA’s theoretical foundations. In a new analysis,8
we develop a generalization of standard CEA methods that re-
solves many of these issues. We begin with one of the simplest

1098-3015/$36.00 - see front matter Copyright ª 2020, ISPOR–The Professional Society for Health Economics and Outcomes Research. Published by Elsevier Inc.

ideas in economics—that of diminishing returns. For example, an
additional $10 000 is worth more when base income is $50 000
than when it is $100 000. This diminishing returns assumption is
already embedded into the way CEA values nonhealth consump-
tion gains (in a period utility function where the other argument is
health-related quality of life). However, the existing CEA frame-
work imposes the restriction that returns to health-related quality
of life (QoL) never diminish.1 Our new study relaxes this restric-
tion, resulting in major changes to the proper conduct of CEA. This
leads to our Generalized Risk-Adjusted Cost-Effectiveness (GRACE)
framework.
The Generalized Risk-Adjusted Cost-Effectiveness framework
justifies the longstanding hypothesis that illness severity should
affect the per-unit value of health improvements. We also show
why QoL gains for persons with disabilities are more valuable than
for comparable nondisabled persons, how to assess the value of
reducing variable treatment outcomes (“value of insurance”), and
why risk-averse consumers may still place value on risky outcome
distributions skewed toward more favorable effects (“value of
hope”).9 Finally, GRACE directly responds to a recent ISPOR task
force urging development of methods to “augment” CEA by
widening the scope of cost-effectiveness models.10
Methods
Background
In standard CEA frameworks, the willingness to pay (WTP) for
health equals the marginal utility of health divided by the mar-
ginal utility of consumption. Willingness to pay per QALY (defined
as K) satisfies K ¼ uCC , where C is annual nonhealth consumption
and uC is the rate at which utility changes with income.11 The
more consumption-related utility sacrificed by diverting spending
to healthcare, the larger is uC and the smaller the CEA threshold,
and conversely. Recent estimates put uc in the neighborhood of
0.3 to 0.5, making K about 2 to 3 times annual nonhealth con-
sumption.11,12 The World Bank estimates that 2019 GDP per capita
in the United States was $65 118, implying (with 17% of GDP spent
on healthcare) that Cz$55 000: For the United States, this trans-
lates to about $110 000 to $165 000 per QALY, within the range
recommended by the Institute for Clinical and Economic Review,2
several prominent clinical organizations,13 and previously by the
World Health Organization.14
Introducing Diminishing Returns to Health
Our model employs a scalar health index, defined on a [0,1]
interval. This could be a QALY or an alternative QoL index defined
over the same interval (eg, one constructed using multicriteria
decision analysis methods15) that has not been converted to util-
ities (eg, by use of standard gamble techniques). Multicriteria
decision analysis combines different dimensions of health into a
single index by introducing importance weights for each compo-
nent of health.  
Under GRACE, WTP for health gains generalize from K ¼ C u1C
 
to KuH R ¼ C uuHC R. We define 2 new parameters, R and uH . The
traditional framework restricts both to equal 1.0. What are these 2
new multipliers, uH and R, and why might they differ from one?
Formally, uH is analogous to uc . It describes how utility
 
(happiness) changes with health-related QoL. The ratio uuHC ex-
 
tends the traditional multiplier u1C by adding the parallel concept
of diminishing returns to health ðuH Þ: When returns to QoL do not
METHODOLOGY 245
diminish, happiness continues to rise proportionately with QoL,
and uH ¼ 1. However, with positive but diminishing returns to
   
health, 0 ,uH ,1, so uuHC , u1C . Other things equal, this reduces
the traditional WTP threshold K.
Next consider R, the disease severity ratio. R adjusts cost-
effectiveness thresholds for disease severity. Quantitatively, R is
the ratio between the marginal utility of health in the sick state
and the marginal utility when healthy. The traditional model
imposes the restriction that R = 1. This is essentially correct for the
mildest diseases, but it understates the WTP threshold—some-
times considerably—for highly severe illnesses.
Variation in R results from diminishing returns to health. If you
are very sick, you derive more incremental value from a fixed QoL
gain than if you are mildly sick. Greater severity means larger
values of R and—consistent with prior empirical research16—
higher WTP for any given health improvement.
Rz1 for trivially minor illnesses, but rapidly rises with illness
severity. The rate of increase depends on how rapidly diminishing
returns set in. Long-established results in economics imply that
consumers experience diminishing returns if and only if they
exhibit risk aversion.17 Therefore, the rate at which R rises with
disease severity also depends on relative risk aversion over QoL
ðrH Þ; which we define as analogous to relative risk aversion in
nonhealth consumption, ðrC Þ. The GRACE framework demon-
strates how to estimate R using the relative QALY loss from a
disease and the degree of relative risk aversion in QoL. Later, we
present some numbers to make this result concrete.
We know of no estimates of rH currently, so estimates of this
parameter are needed; we suggest estimation approaches below.
In the interim, we suggest a benchmark assumption of rH ¼ rC z1,
with appropriate sensitivity analysis around it. Because of the
mathematical relationship between diminishing returns and risk
aversion, one can show under this assumption that uH ¼ uC . In
this special case, the WTP threshold becomes CR. Thus, for
example, if annual average nonhealth consumption were $55 000,
the threshold becomes $55 000 3 R. Under GRACE, WTP for
health increases with illness severity. We call this the risk aversion
and severity-adjusted WTP, or RASA-WTP.
Measuring Risk-Adjusted Health Gains
Recall that diminishing returns to QoL imply consumers will be
averse to risky QoL outcomes.17 This requires accounting for risky
treatment outcomes. To meet this need, we incorporate the utility
cost of risky outcomes into the standard QALY measure. We pro-
duce a new, more general measure of QoL improvement that we
call the risk-adjusted QALY, or RA-QALY. Conveniently, the
RA-QALY can be expressed as the standard average QALY gain
multiplied by a single mathematically defined value, ε, that com-
bines statistical measures of treatment variability with consumer
attitudes toward QoL risk. As discussed further below, our study8
provides details on how to estimate ε from data already gathered
in standard randomized, controlled trials or technology assess-
ments, and from consumer risk preference parameters. If a new
treatment and its comparison therapy have the same risk pa-
rameters, then ε = 1, but if the new treatment reduces overall risk,
then ε . 1, and conversely.
The GRACE framework shows that reducing variance in health
outcomes adds value to a treatment—akin to “the insurance value”
identified in earlier literature.18 In principle, this includes both the
value of physical risk reduction and the value of financial risk
reduction implicit in insurance value. With complete health in-
surance, this reduces to the value of physical risk reduction
alone.18 Allowing for physical and financial risk reduction together
246 VALUE IN HEALTH
complicates the notation, but it is a straightforward extension of
our approach.
The GRACE framework further implies that increasing positive
skewness in treatment outcomes provides value to consumers
who are risk-averse and “prudent” in their risk preferences. Both
risk aversion and prudence seem to characterize real-world con-
sumer risk preferences.19 The idea that patients will prefer treat-
ments that provide a chance for a large positive benefit has been
called the “value of hope,” which has been measured in
patients with cancer.20,21 The RA-QALY properly incorporates
these risk preferences. It penalizes treatments with more variance
in outcomes but rewards those with a high degree of positive
skewness—that is, hope.
Distinguishing Health and Utility
According to The Handbook on Cost-Effectiveness Analysis (2nd
edition, page 52), “Most CEA analysts consider QALYs as measures
of health.”22 It further states that “For those who aspire to connect
QALYs to utility theory, a number of important issues must be
addressed.” Indeed, these issues have created confusion in the
practice of CEA.
Several CEA theorists have recognized that patients may have
risk preferences over QALYs, even though these are not explicitly
measured (cf. 23). The current solution relies on the result from
expected utility theory that consumers remain risk-neutral on the
level of utility, even if risk-averse over levels of consumption and
health. To implement it, analysts convert measures of health into
measures of utility using standard gamble, time trade-off, or visual
analogue scale methods. From this perspective, the ICER is
correctly interpreted as incremental costs per unit gain in health-
related utility. In principle, this allows for risk aversion over QoL.
Unfortunately, one cannot reconcile this approach with a cost-
effectiveness threshold that remains fixed when disease severity
varies. If ICERs measure costs per utility gain, then cost-
effectiveness thresholds reflect WTP for a gain in health-related
utility. Standard economic analysis implies that the WTP for
gains in utility varies with the level of health. Briefly, WTP for
gains in utility is the inverse of the marginal utility of consump-
tion (cf. 1). Cost-effectiveness analysis presumes that utility is the
product of consumption-related utility and health-related utility;
therefore, the marginal utility of consumption will vary with
baseline health. Thus, while health-related utility measures
remain valid under QoL risk aversion, cost-effectiveness thresh-
olds that fail to vary with health become invalid.
The GRACE framework solves this problem by using measures
of health, not utility, as inputs and then by explicitly accounting
for how risk aversion in health affects valuation. Using the mean,
variance, and skewness of distributions of health outcomes, we
create a Taylor series approximation to any sufficiently differen-
tiable utility function to estimate the expected utility of the health
outcome.
Generalized Risk-Adjusted Cost-Effectiveness framework
practitioners have several existing options for health measure-
ment. One is the widely used EQ-5 measure. It assesses health in 5
domains (mobility, self-care, usual activities, pain/suffering, and
anxiety/depression), each rated on a 5-point severity scale (none,
slight, moderate, severe, extreme). Each of these is a measure of
health. They can be combined into a single scalar measure of
health by assessing the relative importance of each domain—for
example, using multicriteria decision analysis models (cf. 15).
Another option is the HUI-3 model, which uses 8 domains but is
otherwise similar. However, the HUI-3 is often converted into
utilities (eg, with standard gamble methods), an unnecessary step
in GRACE.
FEBRUARY 2021
Dealing With Disability
As discussed earlier, many people object to CEA’s valuation of
health improvement for people with disabilities. If permanent
disability reduces people’s life expectancy, then standard CEA
methods say that improving their QoL is not as valuable, because
there are fewer remaining life-years over which to enjoy the
improvement. Standard CEA also says that improving life expec-
tancy is not as valuable, because people with disabilities start with
lower baseline QoL. These issues are exacerbated by the phe-
nomenon of adaptation. People with a particular disability often
rate it as less costly than would nondisabled persons (cf. 24). Thus,
health ratings based on general population surveys may under-
state QoL for disabled people.
The GRACE framework mitigates these concerns, because it
implies that the value of improving QoL of permanently disabled
people is greater than for otherwise comparable nondisabled
people. Due to diminishing returns, greater preexisting disability
implies greater per-QALY value in improving QoL. In some cases,
analysts may wish to consider differences in nonhealth con-
sumption levels between people with and without disability. Here,
one should account for baseline consumption and any disability
insurance payments. Higher consumption levels translate into
higher WTP for health, and vice versa.
Changes in Life Expectancy
Medical technologies affect both QoL and life expectancy (LE).
Many interventions extend LE, including cancer therapies, cardiac
drugs, stents, various surgeries, vaccines against contagious dis-
eases, or smoking cessation support. Some of these come with
risks of reduced QoL (eg, chemotherapy for cancers). Others, such
as monoclonal antibody therapies for some diseases (eg, lupus,
Crohn’s disease, psoriasis, ulcerative colitis), increase risks of
serious infections and even death, with the hope of increasing
QoL. Our methods show how to combine the upside and downside
risks to LE and in QoL in a unified way.
Since returns to QoL diminish, the “exchange rate” between
gains in LE and gains in QoL will vary with disease severity. For
example, a person in a highly disabled but long-lived state might
be willing to give up more LE in exchange for QoL improvements
than a less disabled person. Consequently, GRACE shows that
disabled persons would have different preferences about this ex-
change rate than otherwise similar nondisabled persons. Greater
permanent disability leads to stronger preferences for QoL
improvement over LE improvement. This does not represent bias
against disabled persons in terms of extending their LE, but rather
the plausible reality that a given gain in QoL is worth more to a
person in a disabled state. As noted before, our model heightens
the value of improving QoL for disabled persons, which should
translate directly (in value-based healthcare finance systems) into
stronger incentives for improving QoL among those with perma-
nent disabilities. Many such treatments, of course, will also extend
LE for people with the same disability.
Results and Implementation
Within current CEA methods, a marginal change in QALYs is
defined as ðDSÞQ 1 SðDQÞ, where S is baseline LE, DS the change
in LE, Q baseline QoL, and DQ the change in QoL. DC is the incre-
mental cost of the new technology. In this traditional framework, a
technology with incremental cost, DCost, is welfare-improving if:
DCost
#K (1)
ðDSÞQ 1SðDQ Þ
 METHODOLOGY 247

Table 1. R multipliers for various relative risk aversion and of expected survival (LE) they would give up within this disease
health loss values. state in exchange for restoring ideal QoL. For this disease, the
estimate would be d ¼ LE willing 0:2
to forego
. Once this parameter is
estimated for a disease state, it can be reused for all diseases with
Relative Health Relative Risk Aversion in HealthðrH Þ
Lossð[ Þ the same baseline severity. This can also be achieved, of course,
0 0.25 0.5 0.75 1 1.25 using discrete choice experiment methods.
0 1 1 1 1 1 1 The term ε can be estimated using: (1) relative risk preferences
0.1 1 1.03 1.05 1.08 1.11 1.13
over QoL, and (2) statistical moments characterizing the distri-
bution of QALY gains. Relative risk preferences measure the degree
0.3 1 1.09 1.2 1.31 1.43 1.56 of consumer risk aversion over risky QoL outcomes. Relative risk
0.5 1 1.19 1.41 1.62 2 2.38 preferences can be used over the full range of diseases and
0.7 1 1.35 1.83 2.47 3.33 4.5 treatments, without estimating them anew each time.
A number of approaches to estimating relative risk preference
0.9 1 1.78 3.15 5.61 10 17.7
are available. One is a structured series of discrete choice experi-
Note. This is a condensed version of the table in [8, Table 2]. ment questions that elicit not only relative risk-aversion, but also
higher-order risk parameters, following the methods of Noussair
et al.25 Another might use direct measures of happiness26 and
The GRACE framework produces a similar expression, but with a relate them to income and QoL measures for the same subjects,
few additional parameters. We define the generalized risk- using measures such as the EQ527 to measure health levels.
adjusted QALY (GRA-QALY) as ðDSÞd 1 SðDQÞε. Here, d reflects Properly done, this could provide estimates of the relevant mea-
the QoL units a consumer would give up in exchange for 1 more sures of rC ; rH ; uC ; and uH from the same population.
life-year. In the conventional framework without diminishing Finally, to characterize the distribution of QALY gains, analysts
returns to QoL, this equals the baseline QoL level, Q. With need to estimate: average QALYs in the treated and untreated
diminishing returns, this restriction evaporates. Separately, as states, the variance of QALYs in the treated and untreated states,
noted previously, ε reflects the change in value associated with and the skewness of QALYs in the treated and untreated states.
uncertain treatment outcomes. Treatments with high outcome The second and third pairs of parameters are not typically re-
variance are worth less to risk-averse consumers, so ε , 1. In ported but are simple to calculate from cost-effectiveness models
contrast, treatments with high positive skewness produce “hope” or other studies estimating QALYs gained. Again, we assume that
to consumers who are “prudently” risk-averse,19 so that ε . 1. QALYs continue to be used as a single summary measure of QoL.
In the GRACE framework, technologies should be adopted if Our model admits a range of approaches, so long as they are
and only if: applied uniformly across a wide spectrum of disease conditions.

DCost Risk- and severity-adjusted willingness to pay (RASA-

# KuH R (2)
ðDSÞd1SðDQÞε WTP)

or, in an acronym-rich formulation, ðDCostÞ=(GRA-QALY) # RASA-
WTP. When uH ¼ 1 (constant returns to QoL), ε = 1 (risk neutrality
in health or non-risky QoL outcomes), and d = Q, this collapses to
the traditional formula for cost-effectiveness.
Generalized risk-adjusted QALY
The GRA-QALY incorporates 2 new parameters that can be
readily estimated. First, d is the marginal rate of substitution be-
tween LE and QoL. It can be estimated via time trade-off survey
methods applied to each disease of interest. For example, consider
a new treatment for a disease with a baseline QALY level of 0.8.
The time trade-off survey would ask respondents how many years
Conveniently, once relative risk preference parameters are
estimated, KuH can be calculated directly. This leaves the question
of how to quantify the disease severity ratio, R. Table 1 shows how
R varies with relative risk aversion over QoL, rH , and disease
severity, measured as the percent loss in QoL, [ . The Table 1
values of the risk-aversion parameter, rH , span from rH ¼ 0, the
assumed value in the traditional CEA model, to rH ¼ 1:25. As
context, most modern estimates of rC fall between 0.7 and
1.0.11,25,28 The QoL loss, [ , ranges from 0 (no health loss) to 0.9
(90% reduction from perfect health). If [ ¼ 0:1; then QoL = 0.9 on
a [0,1] scale. If [ ¼ 0:5, QoL = 0.5 on the same scale, and so on.
The R multiplier is somewhat sensitive to rH , particularly for
the most severe illnesses. For [ ¼ 0:9, if rH ¼ 1:25, the R value

Table 2. Severity of illness measures for representative illnesses and disabilities.

Relative Disease Representative Diseases and Conditions

Severity
0.0 to 0.1 Peptic ulcer, stress urinary incontinence; benign prostatic hyperplasia
1.1 to 0.2 Grave’s disease (hyperthyroidism), sleep apnea, hypertension (uncomplicated)
0.2 to 0.3 Hypercholesterolemia (familial), end-stage knee osteoarthritis, peripheral arterial disease
0.3 to 0.5 Type 1 diabetes; acute lung injury; moderate to severe rheumatoid arthritis; relapsing remitting multiple sclerosis
0.5 to 0.7 Transient ischemic attack and carotid stenosis; traumatic brain injury; nursing home resident at risk for pressure
ulcers; secondary progressive multiple sclerosis
0.7 to 1.0 Alzheimer’s disease; metastatic colon cancer; acute pulmonary embolism

Note. All values derived from the Tufts Center for the Evaluation of Value and Risk. This table is taken from [8, Table 3].
248 VALUE IN HEALTH
rises to 17.7, and for rH ¼ 0:25 it falls to 1.78—a 10-fold difference.
This emphasizes the importance of acquiring more precise esti-
mates of rH . The sensitivity to rH falls as [ falls.
To improve familiarity with these ideas, Table 2 shows some
estimated QoL levels for a series of disease and disability condi-
tions, all taken from the Tufts Cost-Effectiveness Analysis
Registry.29
Combining these 2 tables (and the assumption that risk pref-
erences in health and consumption are approximately identical),
we come to a clear conclusion: Current CEA methods overvalue
treatments for mild illnesses (eg, peptic ulcer, benign prostatic
hypertrophy, urinary incontinence) and undervalue treatments for
highly severe illnesses (eg, Alzheimer’s disease, metastatic can-
cers, acute pulmonary embolism, pressure ulcers in nursing
homes). We could be overpaying by a factor of 2-3 for mild ill-
nesses and underpaying for severe illnesses by factors of 4-5 or
more. The exact valuations will hinge on better estimates of risk
preferences in consumption and health. For the sake of
concreteness, suppose that rH z1, and average annual nonhealth
consumption is $55 000. In this special case, the cost-effectiveness
threshold is $55 000  R. Mild illnesses would require a threshold
of $55 000, even though traditional CEA would often ascribe
thresholds of 2 to 3 times average annual consumption. Highly
severe illnesses would call for thresholds of up to $600 000 per
QALY, even holding average annual consumption fixed.
To ease estimation of R, researchers can build a comprehensive
table of illness severity—that is, values of [ —for various health
conditions. This table can be built up over time, similar to ways in
which the Diagnosis-Related Group (DRG) system has improved
calibration of severity to compensate hospitals properly that have
different blends of case-mix severity. As with the DRG system, this
should be done by neutral parties who have no specific financial
interest in the outcome. The Tufts registry29 provides one starting
point for such efforts.
Conclusions
As health payers increasingly turn to CEA for value assessment,
it becomes even more important to assure that it reflect the
preferences of real people. Current models run an important risk
by not considering the consequences of diminishing returns and
risk aversion over health. Continuing to assume that the incre-
mental value of health is invariant to severity of illness endangers
the foundations of CEA. The combination of the diminishing
returns and severity of illness adjustments suggests that we are
probably overvaluing treatments of low-severity illnesses
(possibly by a factor of 2 or more) and undervaluing treatments of
very high-severity conditions (possibly by a factor of 5 or more).
Following other economic literature,25,28 we suggest initially
assuming that risk-related preference parameters (ε; R; d; uH Þ are
constant across the population, but more refined estimates can
allow these to vary across subgroups.
Value assessments drive reimbursement, which signals to in-
novators where best to apply their efforts. Our analysis shows that
value hinges strongly on untreated illness severity, a factor that
current reimbursement processes ignore. This distorts incentives
for innovation, tilting toward treating relatively mild illnesses,
whereas the greatest value comes from treating the most severe
illnesses.
Our model points toward better ways to resolve concerns
regarding how standard CEA discriminates against disabled peo-
ple. We show that improving the QoL of disabled persons is worth
more than for a comparable nondisabled person. It also shows
why disabled persons’ preferences likely will tilt toward tech-
nologies that improve QoL (vs life extension).
FEBRUARY 2021
The GRACE framework shows how to generalize traditional
CEA models to incorporate the effects of diminishing returns to
health improvements as severity of illness increases. This creates
cost-effectiveness thresholds (stated as multipliers of consump-
tion) that incorporate risk preferences both in consumption and in
QoL and that increase with severity of illness. Our model also
incorporates measures of treatment outcome uncertainty, valuing
interventions more when they not only improve average out-
comes but also reduce the uncertainty surrounding those out-
comes. Finally, it provides a coherent way to combine
improvements in QoL and LE in this more generalized framework.
Using this approach will lead to more sensible reimbursement
of medical treatments, will improve the well-being of the most
vulnerable members of our society—those with severe acute ill-
nesses and chronic disabilities—and will rationalize financial sig-
nals sent to innovators of medical technologies as to where best to
apply their efforts toward successful innovation.
Article and Author Information
Accepted for Publication: October 3, 2020
Published Online: January 12, 2021
doi: https://doi.org/10.1016/j.jval.2020.10.003
Author Affiliation: Quintiles Professor of Pharmaceutical Development
and Regulatory Innovation, School of Pharmacy, Price School of Public
Policy, Leonard Schaeffer Center for Health Policy and Economics, Uni-
versity of Southern California, Los Angeles, CA, USA (Lakdawalla); National
Bureau of Economic Research, Cambridge, MA, USA (Lakdawalla); Univer-
sity Professor and Provost Emeritus, University of Rochester, Rochester,
NY, USA (Phelps).
Correspondence: Darius N. Lakdawalla, PhD, Schaeffer Center for Health
Policy and Economics, University of Southern California, 635 Downey Way,
VPD 414K, Los Angeles, CA 90089-3333. Email: dlakdawa@usc.edu
Author Contributions: Concept and design: Lakdawalla, Phelps
Acquisition of data: Lakdawalla
Analysis and interpretation of data: Lakdawalla, Phelps
Drafting of the manuscript: Lakdawalla, Phelps
Critical revision of the paper for important intellectual content: Lakdawalla,
Phelps
Statistical analysis: Phelps
Obtaining funding: Lakdawalla
Administrative, technical, or logistic support: Lakdawalla
Conflict of Interest Disclosures: Dr Lakdawalla reported holding equity in
Precision Medicine Group outside the submitted work; and personal fees
from GRAIL, Pfizer, Novartis, Amgen, Otsuka, and Genentech outside the
submitted work. Dr Phelps reported receiving personal fees from
Audentes Therapeutics, Merck Sharp & Dohme, and Pfizer Pharmaceuti-
cals outside the submitted work.
Funding/Support: The National Institute on Aging (1R01AG062277-01)
provided funding for this research.
Role of the Funder/Sponsor: The funder had no role in the design and
conduct of the study; collection, management, analysis, and interpretation
of the data; preparation, review, or approval of the manuscript; and de-
cision to submit the manuscript for publication.
Acknowledgment: The authors thank Hanh Nguyen, MA, for providing
valued technical assistance.
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