Working Paper: NBER ID: w31524
Authors: Karen Mulligan; Drishti Baid; Jason N. Doctor; Charles E. Phelps; Darius N. Lakdawalla
Abstract: Recent research has documented a link between consumer risk preferences over health and the willingness to pay (WTP) for medical technologies. However, the absence of empirical health risk preference estimates so far limits the implementation of this generalized risk-adjusted cost-effectiveness (GRACE) theory, which addresses several limitations of traditional cost-effectiveness analysis (CEA). To address this gap, we elicit from a nationally representative U.S. sample individual risk preference parameters over health-related quality of life (HRQoL) that shed light on health risk attitudes and enable GRACE valuation of medical technology. We find individuals exhibit risk-seeking preferences at low levels of health, switch to risk-averse preferences at health equal to 0.485 (measured on a zero to one scale), and become most risk-averse when their health is perfect (coefficient of relative risk aversion = 4.36). The risk preference estimates imply an empirical premium for disease severity: each unit of health is worth three times more to patients with serious health conditions (health equals 0.5) than those who are perfectly healthy. They also imply that traditional CEA overvalues treatments for the mildest diseases by more than a factor of two. Use of traditional CEA both overstimulates mild disease treatment innovation and underprovides severe disease treatment innovation.
Keywords: risk preferences; health-related quality of life; willingness to pay; cost-effectiveness analysis
JEL Codes: I11; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| individual risk preferences (D81) | willingness to pay for health improvements (I10) |
| low health levels (I14) | risk-seeking behavior (D81) |
| health improvement (I14) | risk-averse behavior (D81) |
| health level of 0.485 (I12) | most risk-averse preferences (D81) |
| serious health conditions (health = 0.5) (I12) | each unit of health is worth three times more (I10) |
| traditional CEA (F11) | overvalues treatments for mild diseases (I12) |
| overvaluation of treatments for mild diseases (I11) | overstimulation of innovation for mild diseases (O35) |
| overvaluation of treatments for mild diseases (I11) | underprovision of treatments for severe conditions (I12) |