Generalized Risk-Adjusted Cost-Effectiveness (GRACE) – Center for Health Decision Science

The Generalized Risk-Adjusted Cost-Effectiveness (GRACE) framework is a new approach to cost-effectiveness analysis (CEA) that addresses issues related to understanding patient priorities and variation in values given differences in baseline health. Darius Lakdawalla presented this framework at a recent CHDS seminar. Lakdawalla is the Quintiles Chair in Pharmaceutical Development and Regulatory Innovation at the University of Southern California’s School of Pharmacy and School of Public Policy, and the Chief Scientific Officer at USC’s Schaeffer Center for Health Policy & Economics.

Traditional CEAs assume a constant marginal value of health improvements (e.g., quality-adjusted life-year [QALY] gains). However, empirically, consumers place greater value on treating more severe illnesses and payers reimburse more for their treatment. Evidence also suggests that people’s preferences vary with baseline health. Furthermore, traditional CEAs focus on health utility only, so inequality in social determinants of health is not incorporated into distributional CEAs. GRACE provides a conceptual platform to explicitly incorporate preferences into CEAs.

Lakdawalla indicated that GRACE can incorporate any acceptable utility function over health, measured on a non-utility scale. He suggested estimating utility functions under Prospect Theory can account for empirical behaviors including reference dependence, loss aversion, and probability weighting. For example, individuals with disabilities perceive diminishing returns to treating their disabilities (gains) but increasing returns in treatments that avert further deteriorations (losses).

Lakdawalla shared ongoing work that uses discrete choice experiments to estimate prospective theory utility functions for GRACE, and finds estimated utility functions that vary by the reference health state. He discussed how GRACE can incorporate utility over consumption into distributional CEA and thereby integrate estimation of disparities across both consumption and health. To illustrate this point, he presented a case study that is currently underway to address health and consumption inequality reduction from GLP-1 obesity treatment.

Learn more:

Lakdawalla DN, Phelps CE. Health Technology Assessment with Risk Aversion in Health. Journal of Health Economics 2020; 72: 102346.
Lakdawalla DN, Phelps CE. The Generalized Risk-Adjusted Cost-Effectiveness (GRACE) Model for Measuring the Value of Gains in Health: An Exact Formulation. Journal of Benefit-Cost Analysis 2023; 14(1): 44-67.
Mulligan K, Baid D, Doctor JN et al. Risk Preferences over Health: Empirical Estimates and Implications for Medical Decision-Making. Journal of Health Economics 2024; 94: 102857.