Question

Who are the internal and external decision makers for this project analysis?  

    

The phone rang in the office of Jack Smith, an executive at Specialized Medical Devices, Inc. (SMD), a firm that manufactures specialized digital mammography devices. On the line was Dr. Sipparo, Chief of Radiology at Academic Medical Center (AMC). Dr. Sipparo explained that she needed Smith's help in understanding an analysis prepared by the staff of Dr. Alexander, AMC's Chief Executive Officer, of the pending purchase of new imaging e.q uipment for the evaluation of patients presenting for breast cancer screening. AMC is evaluating two types of imaging equipment-standard screen-film mammography equipment and a machine offered by SMD that allows for full-field digital mammography with tomosynthesis. Dr. Sipparo explained the situation as follows:

Based on his staff's cost analysis, Dr. Alexander believes the hospital should purchase the conventional mammography equipment rather than the digital mammography machine. The physicians in the radiology department are very upset by this. They want the hospital to purchase the tomosynthesis scanner because it incorporates the latest imaging technology. In addition, Dr. Sipparo is not convinced by Dr. Alexander's staff,s analysis that the conventional equipment is really the better choice even from a purely financial perspective.­The capital budget committee meets next week, and Dr. Sipparo needs Smith's help. Dr. Sipparo has asked Smith to evaluate the analysis prepared by Dr. Alexander,s staff and to recommend changes to his analysis if he believed they were warranted.

Digital mammography, which eliminates the film and lab costs associated with conventional mammography, provides the ability to combine multiple images taken from slightly different angles into three-dimensional-(3D) images. Tomosynthesis is a relatively new technology that has been developed for use with digital mammography that allows for multiple high-resolution cross-sectional images of the breast to be obtained at the same dose as conventional screen-film mammography.

Tomosynthesis proponents argue that this 3D image may allow for improved detection of breast cancer and for fewer false-positive screening mammograms. In current practice, 7 to 15% of women undergoing mammog­ raphy screening may be recalled for additional mammography or ultrasound images. Approximately 50% of these women may have a suspicious-looking area on the mammogram, resulting from normal breast tissues from several areas of the breast that are superimposed to look like a lesion or other abnormality. Tomosynthesis, which allows cross-sectional viewing of the breast, may allow the radiologist to differentiate between superimposed tissue and actual lesions, thereby allowing for a reduction in the recall rate. Reducing the recall rate is an important goal because of the anxiety associated with being asked to return for additional views. It is also possible that tomosyn­ thesis may increase the positive biopsy rate. Tomosynthesis might also allow the complete patient workup in one visit for many women, a significant goal given the noncompliance with recommended follow-up after abnormal screening studies.

Dr. Alexander remains skeptical, however. He is concerned that full-field digital mammography with tomo­ synthesis will increase the hospital,s initial fixed costs of screening, while many of the reduced costs will accrue to the patient and to the payer, for which the hospital is not remunerated or tangibly rewarded. He also is concerned about the increased time it will take for radiologists to learn how to use this new technology.

Dr. Alexander's staff had analyzed the two alternatives using an equivalent annual cost (EAC) method. Because the alternatives have different useful lives, EAC appeared to be the best way to determine which type of equipment would be more cost effective for the hospital. Essentially, EAC is the amount of an annuity that has the same life and present value as the investment option being considered. Thus, Dr. Alexander based the cost comparison on the initial outlay costs of both types of imaging equipment and on the annual maintenance, personnel-related, and other costs associated with the two equipment types. Dr. Alexander wants to purchase the conventional mammography equipment because it results in lower cost for AMC.

Dr. Sipparo, however, remains convinced that full-field digital mammography with tomosynthesis is the right decision. She believes the technology is superior, offers better care, and, ultimately, will reduce many of the long­ term costs associated with breast cancer screening and diagnosis. Without a strong financial background, she is unsure how to convince Dr. Alexander of this, which is why she contacted Smith. She wants his help to prepare an alternative analysis using the latest financial decision-making tools.

Answer 1

In this situation, it becomes important to accurately analyse the cash flows of both the options and then use NPV or Profitability Index to arrive at a decision. With digital equipment, the hospital can save on film and lab costs. Also, with lower recall rate the hospital can save manhours. All these costs and savings should be quantified and analysed to arrive at the best decision. Moreover, other qualititative factors should also be considered along with the quantitative factors to make an informed decision in interest of all the stakeholders.

Internal decision makers are Dr. Sipparo, Dr. Alexander and Dr. Alexander's staff.

External decision maker is Jack Smith.