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

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

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

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

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

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

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

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

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

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

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

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

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 .3 112.500 .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

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

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

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

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

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

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

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

Expected Value of Perfect Information (EVPI) EVPI = EVUC-EMV EVUC = Σj pj (Best Oij given Sj) EVUC = (.2*15000) + (.6*200000) + (.2*725000) = 268000. EMV = $177,000 EVPI = $268,000 – $177,000 = $91,000 Chapter 3: Quantitatve Methods in Health Care Management Yasar A. Ozcan

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

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

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

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

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

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

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

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