Valuing Health The Generalized and Risk-Adjusted Cost-Effectiveness (GRACE) Model

Cost-effectiveness analysis (CEA) plays an important role in health policy debates, helping to shape resource allocation and pricing decisions. Yet many economists also recognize that the current framework can offer misleading and incomplete results. Current CEA methods imply that health improvements are equally valuable to those in good health and poor health, which fails to recognize the increased value of health improvements for those with severe illness or disability.

Valuing Health introduces the generalized risk-adjusted cost-effectiveness (GRACE) model as a more accurate method for determining the value of medical treatments and technologies. The GRACE model generalizes the underlying CEA assumption of constant gains in health care, demonstrating through diminishing returns the greater economic value of improving the quality of life for individuals with disability or severe illness. Valuing Health also provides sensitivity analyses to show how value measurements change alongside key parameters, including the potential effects of various combinations of risk preferences on the aggregate value of treating a defined population with any set of available treatments. It concludes with a discussion of the ethical differences between the CEA and GRACE methods and outlines steps for implementing the GRACE model to replace standard CEA as the proper method for valuing medical interventions.

Valuing Health offers a revelatory reconceptualization of current valuation models in health economics with clear guidance for inclusive pricing and regulation that reflects the true value of modern health care.

Charles E. Phelps, PhD, is University Professor and Provost Emeritus at the University of Rochester. He has previously served as Director of RAND's Program on Regulatory Policies and Institutions and helped found the RAND Health Insurance Study. He is the author of more than one hundred peer-reviewed articles in health economics and policy and the foundational textbook, Health Economics. He has been a member of the National Academy of Medicine since 1991 and he received the Victor R. Fuchs Award for Lifetime Contributions to the Field of Health Economics from the American Society of Health Economists in 2019. He currently serves as a consultant to the Innovation and Value Initiative and the Office of Health Economics in the United Kingdom.

Darius Lakdawalla, PhD, is Quintiles Professor of Pharmaceutical Development and Regulatory Innovation, Professor of Pharmaceutical Economics and Public Policy, and Director of Research at the Leonard D. Schaeffer Center for Health Policy and Economics at the University of Southern California. Dr. Lakdawalla is currently a research associate at the National Bureau of Economic Research and an associate editor for The Journal of Health Economics. He previously served as Associate Editor at the Review of Economics and Statistics and the American Journal of Health Economics. The author of over one hundred peer-reviewed articles across economics, medicine, and health policy, Dr. Lakdawalla has been awarded the Garfield Prize, the Milken Institute Award for Distinguished Economic Research, and the International Society for Pharmacoeconomics and Outcomes Research (ISPOR) Excellence in Research Methodology Award.