#4913 Topic: Math

' 208 CHAPTER 10: DECISION ANALYSIS

Payoff

Breast Cancer -$150,000 + -$225 .

No Breast Cancer $225

Breast Cancer -$150,000

No Breast Cancer $0

Figure 10-3 Breast Cancer Screening Decision Tree

Although the difference is small, the expected payoff rule says that we would choose to screen women over 50. The savings from advanced cases averted com-. pensate for the costs associated with screening. ·

CONCLUSION

Decision analysis provides a quantitative method for choosing among options in the face of uncertainty. It allows us to specify alternatives and estimate payoffs of decisions based on our assessment of their likelihood of occurrence. It further allows the health care manager to assess how different probabilities of future states of the world affect decision making. Decision analysis has three core component parts: the alternatives, the anticipated or forecasted · state of the world that will occur after the decision is made, and the payoffs assigned to each. It is important to note, however, that in healthcare management decision making, expected pay- off is not always the only· criterion we ,use for assessing choices. It is import;_ant to consider patients' quality of life and other values important to the community,

,because it is not just the decision but the consequences of that decision that are ultimately most important.

EXERCISES

10-1 Draw a decision tree for the bid- for services example. @ In the ciuiic renovation example, what if management thinks that the likeli-

hood of current demand remaining is 30%, tlie likelihood of a moderate increase is 25%, and the likelihood of a large increase is 45%? What should they do, according to the expected total payoff?

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248 CHAPTER 12: PROGRAM EVALUATION REVIEW TECHNIQUE

PERT requires comprehensive project planning. During the concept and defini- tion phase of a project, ~roject managers construct and consider many different project approaches using PERT as a basis for moving forward. As circumstances change or develop, the ~roject may need to be adjusted to accomplish its objec- tives. PERT provides th1 tools to do this by stressing the interrelation of project activities. It further provtdes an explicit tool for measuring the time/cost tradeoff inherent in any large-scaie project.

~RCISES

(!VI Using the informa~on in Table 13:J, construct a PERT network and answer each of the followiJg questions: a. What is the expected project completion data? b. What is the scheauled start and completion date for each activity? c. Which activities 6-re on the critical path? d. How long can nohcritical path activities be delayed without jeopardizing

the overall compietion date for this project? Assess the impact of the following changes to the time estimates provided in question 12-1. Individually, what is the impact if:

Activity \ Predecessor 0. Advertise for nej'. staff N P. Interview for new staff 0 Q. Select new staff \ P

New Time Estimate 4 6 1

Collectively, what is the impact of these changes?

If.:;;} As project manager\ for the example included in question 12-1, wh~t ~ would you recommerd to preserve the original project completion date'

if activity A was ree~timated to take 8 weeks, not the original 4 weeks? Provide details. \

12-4 Develop a WBS and PiERT network with no more than 20 activities for ea~~ . of the following projects. ,- a. Buying a car \ . b. Screening 1000 school-age children for high blood pressure and

the results to the c 1·1d's physician

,1'/~ojoct to Coovert_, 20-B_,d Unit ;u, Non,;»g Home to ,~y/: Accommodate Patients with DementJ.a

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?~=· <>, _;£, Time estimate

Activity Predecessor (weeks)

A Secure state approval 4

B Identify 20-bed unit to _ A 1 be used

C Move existing residents B 1

D Clean space C 2-

E Develop architectural plans A 9 F Install new heating and E 4

ventilation systems

G Install security systems E 2

H Move walls; renovate F 4

Identify new equipment A 1

J Order new equipment I 1

K Unpack and inspect new J 1 equipment

L Install new equipment D,K,H 3

M Reassign staff A 1

N Identify new staffing needs M 1

0 Advertise for new staff N 3 p Interview for new staff 0 2

Q Select new hires p 3

R Develop care plan protocols M 1

s Train staff R,Q,M,L 1 T Modify quality assurance plans s 2 u Coordinate with hospital T 4

·discharge planners

V Complete internal audit U,G 1

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Exercises 269

EXERCISES

(3.13-1 representative of a reputable financial services company has approached , ou as manager of a four-person group of anesthesiologists with an oppor- \__ tunity to purchase a 10-year annuity due for each member of the group.

The annuity due would pay $40,000 each year-beginning 5 years tfom now (i.e., at time = 5). What is the most you would be willing to pay now, per each physician, for this investment? Assume an appropriate discount rate of7%.

Q The hospital's marketing and finance departments have just provided you, as ~ chief financial officer, with pro forma income statements for your proposed

soncigram center. These statements appear in the following.

Pro fonna Income Statement (000)

Time t + 1 t + 2 t + 3 t + 4 Service Revenues (net) $425 $500 $580 $700 Expenses $400 $450 $525 $600 Depreciation Expense $ 35 $ 35 $ 35 $ 35 Net Income ($ 10) $ 15 $ 20 $ 65

What is the project's IRR? Assume an initial investment of $175,000 and an appropriate discount rate of 6%. The hospital is operated as a not-for-profit facility.

~he chief operating officer (COO) of a small, not-for-profit community hcis- V;ital has to make a recommendation to the board of trustees on choosing

among two project options for an unrestricted gift of $250,000 that has just been received. The board has established a time horizon of 5 years on this

._project.The options are described in the following. ,&:'\Purchase the practice of a young physician (the hospital's third highest V admitter). Estimates of projected cash flows for the practice (post-

purchase), are:

Probability of Cash Flow

Time 60% 20% 20% t + 1 $ 40,000 $20,000 $ 60,000 t + 2 $ 60,000 $30,000 $ 80,000 t+3 $ 75,000 $40,000 $100,000 t + 4 $100,000 $50,000 $125,000 t + 5 $100,000 $50,000 $125,000

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- 270 CHAPTER 13: FINANCIAL EVALUATION OF PROJECTS

Q Purchase an upgraded analyzer for the laboratory. Based on forecasts of _laboratory utilization, the net cash flows for this project are:

·Time Net Cash Flow t + I $75,000 t + 2 $75,000 t + 3 $50,000 t + 4 $50,000 t+ 5 $50,000

Which investment should the COO recommend and why?

13-4 What are some of the factors that can influence the riskiness of projects (investments) in healthcare organizations?

270 . CHAPTER 13: FINANCIAL EVALUATION OF PROJECTS

b. Purchase an upgraded analyzer for the laboratory. Based on forecasts of laboratory utilization, the net cash flows for this project are:

·Time Net Cash Flow t + 1 $75,000 t + 2 $75,000 t + 3 $50,000 t + 4 $50,000 t + 5 $50,000 Which investment should the COO recommend and why?

13-4 What are some of the factors that can influence the riskiness of projectE (investments) in healthcare organizations?