HEALTH SYSTEMS 2013/2014

EXERCISES: DECISION ANALYSIS AND RESOURCE ALLOCATION

In this class you are expected to:

Be able to apply simple tools to deal with uncertainty from decision analysis;
Be able to structure a linear programming model, and to calculate the solution, either
graphically, either using an Excel solver;
Get an understanding from the analysis of linear programming models.

EXERCISE 1: Basic decision making under uncertainty

WECARE, a newly formed primary care group practice, is seeking a location among ve
possible sites. For these practices, which are largely unregulated for their locations, the
location decisions are inuenced mainly by market forces and the personal preferences of the
key physicians. The data on potential prot for the demand levels at each possible site are
shown in Table 1
Table 1

Payoff: Profit (in $1,000) for Demand Levels

Physician Preferred Sites
High Medium Low
A 350 150 (250)
B 590 350 (500)
C 600 225 (250)
D 550 400 (250)
E 475 325 (200)

a) Some members of the practice are pessimists; which location would they choose?
b) There also are very optimistic members in the group; which location would they choose?
c) What would be the Laplace strategy solution for the site?
d) What is the minimax regret solution to this problem?
e) What is the solution for a Hurwitz optimism value of 0.4?
WECARE group practice hired an analyst who estimated the probability for each demand level
at each site as shown in Table 2.

Table 2

Probability for Given Level of Potential Demand

Physician Preferred Sites
High Medium Low
A 0.10 0.55 0.35
B 0.20 0.50 0.30

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 C 0.10 0.60 0.30
D 0.15 0.40 0.45
E 0.30 0.40 0.30

f) Using data from Table 1, what is the EMV solution to the site selection?

EXERCISE 2: Basic decision tree

Given the decision tree in the figure below, which alternative should be chosen?

Figure 1

EXERCISE 3: Decision trees

The health care manager is quite concerned about the recent deterioration of a section of the
building that houses her urgent care operations. According to her analyst assistant, four
options merit her consideration: (A) a new building, (B) major structural renovation, (C)
moderate renovation, and (D) minor renovations. Moreover, three possible weather
conditions could affect the costs of fixing the building within the next six months. Good
weather condition has a probability of 0.40; moderate weather with rain has a probability of
0.35, and bad weather has a probability of 0.25. If good weather materializes, (A) will cost $
215,000; (B) will cost $ 120,000; (C) will cost $ 90,000; and (D) will cost $ 56,000. If moderate
weather materializes, the costs will be $ 255,000 for (A); $ 145,500 for (B); $ 98,000 for (C);
and $ 75,000 for (D). If bad weather materializes, the costs will be $ 316,000 for (A); $ 214,000
for (B); 123,000 for (C); and $ 119,000 for (D).
a) Draw a decision tree for this problem.
b) Using expected monetary value (rollback procedure), which alternative should be chosen?

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EXERCISE 4: Solving simple linear programming problems
Given the following linear programming formulation:
Maximize 1,6001 + 3,0002
Subject to:
401 + 252 80,000 (1)
201 + 302 60,000 (2)
1 , 2 0 ( ).

a) Solve the problem graphically.

b) Solve the problem using Excel solver.
c) What is the total objective function value?
d) Do both variables contribute to the solution? Why?
e) Does any variable have a slack value? If so, what does it mean?

EXERCISE 5: Structuring and solving simple linear programming problems

The cost of providing public services at a local hospital has been scrutinized by management.
Although these services are used as marketing tools for the hospital, the cost and availability of
scarce resources require their optimal allocation while minimizing costs.
Two popular programs being assessed for this purpose are Family Planning (FP) and Health -
Drive - Screenings (HDS); their costs to the hospital for each offering are $200 and $400,
respectively. The health care manager in charge of operations found three common patterns
of resource consumption for each of these services and the available resources, shown in Table
3.
Table 3

Resource Type FP HDS Available Resources per Month

Staff time 60 120 480 minutes
Materials 30 90 250 kits
Rent space 1 3 occasions

a) Formulate this as a linear programming problem.

b) Solve the problem graphically.
c) Solve the problem using Excel solver.
d) In a given month, how many FP and how many HDS should be offered?
e) With the proposed class offerings, how many kits will be left over (not distributed in the
classes)?
f) What is the yearly cost of these two programs to the hospital?

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EXERCISE 6: Structuring and solving simple linear programming problems
A hospital is evaluating the feasibility of offerings among three technologies, on the basis of
what would make the most profit. These new technologies are:
1. Closed - chest cardiac bypass surgery with daVinci Surgical Robot
2. Gamma knife
3. Positron emission tomography (PET) scanner
Table 4 gives the information on profit, the amount of common resources used by each of the
three technologies per case, and their available resources per month:
Table 4

daVinci Gamma Knife PET Available Resources

Profit $ 2,000 3,500 2,000
Total staff time 15 12 1.5 2,000 hours
Maintenance 25 25 22 1,500 minutes
Computer resources 20 25 10 3,000 minutes

a) Formulate this as a linear programming problem.

b) Solve the problem using Excel solver.
c) Based on optimal solution, which product(s) should be offered, and how many procedures
can be offered in a month?
d) What is the expected contribution of new technology to the hospitals monthly profits?

EXERCISE 7: Structuring and solving simple linear programming problems

A community hospital is planning to expand its services to three new service lines in the
medical diagnostic categories (MDCs) and their corresponding diagnostic related groupings
(DRGs) shown in Table 5.
Five common resources must be allocated among these three new service lines according to
which will bring the most revenue (using overall average DRG payments in a given MDC
category). The resources are beds (measured as patient days), nursing staff, radiology,
laboratory, and operating room. The health care manager in charge of this expansion project
obtained the average consumption patterns of these resources for each MDC from other peer
institutions, and estimated the resources that can be made available (per year) for the new
service lines in Table 6.
Table 5

MDC DRGs Description

2 36-47 Diseases and disorders of the eye
19 424-433 Mental diseases and disorders
21 439-455 Injury, poisoning, and toxic effects of drugs

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 Table 6

Resource Category MDC-2 MDC-19 MDC-21 Available Resources

Length of stay (LOS) 3.3 6.1 4.4 19,710
Nursing hours 3 5 4.5 16,200
Radiology 0.5 1.0 3,000
procedures
Laboratory 1 1.5 3 6,000
procedures
Operating room 2 4 1,040

Average revenues from MDC - 2, MDC - 19, and MDC - 21 are $ 8,885, $ 10,143, and $ 12,711,
respectively.
a) Formulate this as a linear programming problem.
b) Solve the problem using Excel solver.
c) To get the most revenue, which service(s) should be offered?
d) What is the optimal volume(s)?
e) What is the total expected revenue from the new services?
f) Which resources should be expanded?
g) How much additional revenue can be expected if resources are selected in part (f) for
expansion without violating the current solution?

EXERCISE 8: Structuring and solving simple linear programming problems

A regional laboratory that performs nontraditional tests is planning to offer new diagnostic
tests for regional hospitals. Current analyzers and staff are capable of performing these tests.
The laboratory manager assessed the required staff and analyzer times, as well as the chemical
materials required for a bundle of 50 vials for each type of test listed in Table 7.
Table 7

Available
Test Type I II III IV V
Resources
Profi t ($) 8 10 8 7 10
Staff (minutes) 15 15 15 20 25 3,400
Auto analyzer
equipment 20 40 40 60 45 6,000
(minutes)
Materials 12 15 16 14 14 2,700

a) Formulate this as a linear programming problem.

b) Solve the problem using Excel solver.
c) For the optimal solution, in terms of profit, which test(s) should be offered?
d) What is the optimal volume(s)?
e) What is the total expected profit from the new tests?

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f) Which resources should be expanded?
g) How much additional revenue can be expected if the resources are selected in f) for
expansion without violating the current solution?

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