“Real Options Reasoning in Healthcare: An Integrative Approach and Synopsis”, Article Critique Example

In their article, Williams, Hammes, and Karahalis (2007) examine the usefulness of real options in budgeting for healthcare.  Real options is a strategic decision making process for capital budgeting that involves considering the value of delaying decisions and outlays of capital against future returns.  The concept is contrasted with the standard net present value approach which does not value the returns associated with delaying decisions.

The authors suggest that the best technique for healthcare capital budgeting is a combination of scenario-planning and real options reasoning.  Scenario-planning involves creating decision trees that trace the usefulness and outcomes of budgeting decisions throughout the organization.  While healthcare institutions have used scenario-planning for many years, the addition of real options reasoning introduces new information that can assist in budgeting.  With real options reasoning, a financial manager can assess not only the current value of budgeting decisions within a scenario but also the value of delaying a decision.  So, essentially, financial managers using scenario-planning have typically just compared the expected returns from certain scenarios.  Using real options reasoning, these managers could compare not only the expected returns from a decision but also the savings and returns of delaying a decision.  In the end, the use of real options reasoning gives greater weight to scenario-planning and allows for a more complete financial analysis.

The remainder of the article examines a hypothetical budgeting example in a healthcare institution.  Overall, the article is well-researched.  The authors prove the value of real options reasoning in healthcare budgeting through both logic and real world examples.

References

Williams, D. R., Hammes, P. H., & Karahalis, G. G. (2007). Real options reasoning in healthcare: An integrative approach and synopsis. Journal of Healthcare Management, 52(3), 170-86; discussion 187.