Economics - General

# The Standard Gamble

One concept often used in healthcare is the quality-adjusted life years (QALY).  The concept is fairly simple.  It assumes that people value one year of life in perfect health at 1; people who die have a value of a life year of 0.  One year of life where you have 50% health is then valued at 0.5.

The question is, how do you determine what share of a life year different health states are.  What share of a life year do I value if I break my arm?  What if I am paralyzed?

One approach to quantifying the value of different health states is through a standard gamble.  Hammitt et al. (2012) describes how this is calculated. The standard gamble gives people two option. One option is living for t years in health state h.  For instance, one could live for 5 years with a broken arm. In the second option, the patient has a probability p of living t’ years in perfect health (i.e., h=1) or immediate death (i.e., t”=0).

The goal of the standard gamble is to determine the value of p.  If a patient prefers to live for 10 years with a broken arm compared to 5 years in perfect health, but would prefer to live 5 years in perfect health to 9 years and 11 months with a broken arm, then, the value of is 0.5.  In essence, 0.5 years of perfect health is equivalent to 1 year with a broken arm.  Thus, the value of a QALY with a broken arm (in my simple and very unrealistic example) is 0.5.