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Estimating optimal willingness to pay thresholds for cost-effectiveness analysis: A generalized method.

Charles E Phelps1, Chris Cinatl2

  • 1University of Rochester, Rochester, New York, USA.

Health Economics
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PubMed
Summary

Determining cost-effectiveness analysis (CEA) thresholds (K) is crucial. This study uses flexible utility functions to estimate optimal willingness to pay (WTP) thresholds, finding K/M ratios generally between 1 and 3.

Keywords:
cost-effectivenessdecision-makinghealthmedical carewelfare

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Area of Science:

  • Health Economics
  • Decision Analysis
  • Risk Theory

Background:

  • Cost-effectiveness analysis (CEA) requires setting maximum willingness to pay (WTP) thresholds (K).
  • Previous methods often used restrictive utility functions.
  • A generalized approach is needed to encompass diverse risk behaviors.

Purpose of the Study:

  • To generalize methods for estimating optimal WTP thresholds (K) using flexible hyperbolic absolute risk aversion (HARA) utility functions.
  • To analyze how optimal thresholds vary with income and risk preferences.
  • To provide a more robust framework for operationalizing CEA.

Main Methods:

  • Utilized hyperbolic absolute risk aversion (HARA) utility functions to model a wide range of risk behaviors.
  • Derived formulas for relative risk aversion (r*) and relative prudence (π*).
  • Calibrated the HARA model using literature-based estimates and assessed optimal K and K/M ratios.

Main Results:

  • Optimal K/M ratios were estimated to be in the range of 1 to 3 for plausible risk preferences.
  • Optimal K increases with income, while K/M decreases with income under increasing relative risk aversion.
  • Results align with previous studies using simpler Weibull functions.

Conclusions:

  • The HARA model offers a more general framework for understanding optimal CEA thresholds.
  • Estimating relative prudence (π*) with greater precision can refine K/M estimates.
  • The findings illuminate the income-dependent nature of optimal WTP thresholds.