1. Chapter 3. Decision Making in Healthcare Facilities
What should I do?
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

2. Outline Decision Process What Causes Poor Decisions?
The Decision Level & Decision Milieu
Decision Making under Uncertainty
Payoff Table
Methods
Decision Making under Risk
EVM, EOL, EVPI
Decision Tree Approach
Rollback Procedure
What if Payoff Values are Cost?
Decision Analysis with Non-Monetary Values & Multiple-Attributes
Dominance
Minimum Attribute Satisfaction
Most Important Attribute
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

3. The Decision Process Identification of the problem and its nature
Specification of objectives and decision criteria
Development of alternatives
Analysis and comparison of alternatives
Selection of the best alternative
Implementation of the choice
Controlling and monitoring the results
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

4. What Causes Poor Decisions?
Mistakes in the Decision Process
Bounded Rationality: is the limits imposed on decision making by costs, human abilities and errors, time, technology, and the tractability of data.
Suboptimization: is characterized by Decisions are often departmentalized as separate organizational units compete for scarce resources. Individual departments often seek solutions that benefit their own department, but not necessarily the healthcare organization as a whole.
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

5. Decision Theory
represents a general approach to decision making which is suitable for a wide range of operations management decisions, including: capacity, service design, location planning, equipment selection, etc.
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

6. The Decision Level & Decision Milieu
Certainty-- Known values for parameters of interest
Uncertainty-- Impossible to assess the likelihood of various possible future events
Risk-- Certain parameters have probabilistic outcomes
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

7. Certainty
Certainty rarely exists, especially in health care decisions. But if it does, simply choose the best available option (highest profit/least cost).
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

8. Decision Making under Uncertainty
Maximin-- best of the worst (pessimist)
Maximax-- best of the best (optimist)
Hurwitz-- allows you to adjust the probabilities/weighing between maximin and maximax or pessimist vs. optimist
Laplace-- best average payoff
Minimax Regret-- best of the worst regrets
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

9. Decision Tools Table 3.1 Payoff Table Alternative\State of Nature S1
……. Sn A1
O11
O12
O1n A2
O21
O22
O2n …
….. Am
Om1
Om2
Omn
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

10. Example 3.1: A major imaging center is not able to meet the increased demand from patients for MRIs. The administration is willing to explore the possibilities by evaluating such alternatives as adding one or two additional units or out sourcing to other image centers and earning a commission of $30.00 per MRI.
A feasibility analysis showed that three major demand chunks could occur in the future, summarized as 500, 750 and 1000 additional MRI requests. The financial analysis of the potential business summarizes profits/losses under additional MRI demand chunks in a payoff table shown in Table below.
Alternatives
500 Cases
750 Cases
1000 Cases
Buy One MRI Unit
-15*
200
300
Buy Two MRI Units
-150
100
725
Outsource 15
22.5 40
* in $ 000s
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

11. Maximin Solution Alternatives 500 Cases 750 Cases 1000 Cases Worst
Buy One MRI Unit
-15*
200
300
-15
Buy Two MRI Units
-150
100
725
Outsource 15
22.5 40
* in $ 000s
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

12. Maximax Solution Alternatives 500 Cases 750 Cases 1000 Cases Best
Buy One MRI Unit
-15*
200
300
Buy Two MRI Units
-150
100
725
Outsource 15
22.5 40
* in $ 000s
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

13. Hurwitz Solution
For optimism with α = 0.5.
Then the HV value for the three alternatives would be:
HV (Buy one MRI unit) = .5(300,000)+(.5)(-15,000) = 142,500.
HV (Buy two MRI units)= .5(725,000)+(.5)(-150,000)= 287,500.
HV (Outsource) = .5(40,000)+(.5)(15,000) = 27,500. α HV
Decision Alternative
1.0
725,000*
Buy Two MRI Units .5
287,500 .4
200,000 .3
.24
60,600
Buy One MRI Unit .2
48,000 .1
17,500
Outsource
15,000
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

14. Opportunity Losses (Regrets)
Alternatives
500 Cases
750 Cases
1000 Cases
Worst
Buy One MRI Unit
30*
425
Buy Two MRI Units
165
100
Outsource
177.5
685
* in $ 000s
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

15. Laplace Strategy Probability 1/3 Expected Value Alternatives 500 Cases
Buy One MRI Units
-15*
200
300
161.67
Buy Two MRI Units
-150
100
725
225
Outsource 15
22.5 40
25.89
* in $ 000s
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

16. Expected Value Model EMV(Ai) = Σj pj Oij
Once the healthcare manager has assessed the probability distribution, computation of the expected values for each alternative is straightforward, as follows:
EMV(Ai) = Σj pj Oij
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

17. Payoff Table for EMV Probability .2 .6 Expected Value Alternatives
500 Cases
750 Cases
1000 Cases
Buy One MRI Unit
-15*
200
300
177
Buy Two MRI Units
-150
100
725
175
Outsource 15
22.5 40
24.5
* in $ 000s
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

18. Expected Opportunity Loss
The probabilities can also be incorporated into the regrets (or opportunity losses) calculated earlier. In this way the healthcare manager can assess the expected losses and try to minimize them with proper decision. Calculations of expected opportunity loss follow the formula:
EOL(Ai) = Σj pj Rij
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

19. Expected Opportunity Loss
Probability .2 .6
Expected Opportunity Loss
Alternative
500
Cases
750
1000 Cases
Buy One MRI Unit
30*
425 91
Buy Two MRI Units
165
100 93
Outsource
177.5
685
243.5
* in $ 000s
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

20. Expected Value of Perfect Information (EVPI)
EVPI = EVUC-EMV
EVUC = Σj pj (Best Oij given Sj)
Probability .2 .6
Alternatives
500 Cases
750 Cases
1000 Cases
Buy One MRI Unit
-15*
200
300
Buy Two MRI Units
-150
100
725
Outsource 15
22.5 40
* in $ 000s
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

21. Expected Value of Perfect Information (EVPI)
EVPI = EVUC-EMV
EVUC = Σj pj (Best Oij given Sj)
EVUC = (.2*15000) + (.6*200000) + (.2*725000) =
EMV = $177,000
EVPI = $268,000 – $177,000 = $91,000
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

22. What if Payoffs are Costs?
Alternatives
500 Cases
750 Cases
1000 Cases
Buy One MRI Unit
2,050*
2,075
2,100
Buy Two MRI Units
4,050
4,075
4,100
Outsource 5 10 15
* in $ 000s
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

23. Regret Table Using Costs
Alternatives
500 Cases
750 Cases
1000 Cases
Buy One MRI Unit
2,050-5=2,045*
2,075-10=2,065
2,100-15=2,085
Buy Two MRI Units
4,050-5=4,045
4,075-10=4,065
4,100-15=4,085
Outsource
5-5=0
10-10=0
15-15=0
* in $ 000s
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

24. Decision Tools-- The Decision Tree
Outcomes
Events 1 2 3
Decision
Node
Event
Actions
Action A
Action B
Action C
Outcome 1
Outcome 4
Outcome 7 1 2 3
Outcome 2
Outcome 5
Outcome 8 1 2 3
Outcome 3
Outcome 6
Outcome 9
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

25. Figure 3.1 Decision Tree * in $000 -$15* $200 $300 Buy One MRI Unit
500 Cases, p=.2
750 Cases, p=.6
$200
1000 Cases, p=.2
$300
Buy One MRI Unit
-$150
500 Cases, p=.2
Buy Two MRI Units
750 Cases, p=.6
$100
1000 Cases, p=.2
$725
Outsource
$15
500 Cases, p=.2
750 Cases, p=.6
$22.5
* in $000
1000 Cases, p=.2
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan
$40

26. Analysis of the Decision Tree: Rollback Procedure
-$15*
500 Cases, p=.2
177
750 Cases, p=.6
$200
1000 Cases, p=.2
$300
Buy One MRI Unit
-$150
500 Cases, p=.2
Buy Two MRI Units
750 Cases, p=.6
175
$100
177 ║
1000 Cases, p=.2
$725 ║
Outsource
$15
500 Cases, p=.2
750 Cases, p=.6
24.5
* in $000
$22.5
1000 Cases, p=.2
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan
$40

27. Multi-attribute Decisions
Dominance Procedure: compares a pair of alternatives attribute by attribute.
Minimum Attribute Satisfaction Procedure: satisfactory levels are set for each alternative
Most Important Attribute Procedure: attributes are ranked in order of importance
Combination: combines two or more of the above procedures.
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

28. Decision Analysis with Non-Monetary Values and Multiple Attributes
Attributes* \ Alternative
Cardinal
McKesson
Owens & Minor
Importance
Ranking
Minimum
Acceptable
Level
Availability 7 1
>= 7
Reliability of IT Technology 5 2
>= 6
Quality of Products 8 9 3
Cost in $000 per year
23,749
24,195
23,688
<=25,000
On Time Delivery
97%
95% 4
>=95%
*Attributes are scored on a 1-10 scale (with the exception of those associated with costs and on-time-delivery percentage), score of 10 being most favorable.
Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan

29. The End Chapter 3: Quantitatve Methods in Health Care Management
Yasar A. Ozcan