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ECONOMICS, EDUCATION, AND HEALTH SYSTEMS RESEARCH

Managing Risk and Expected Financial Return from Selective Expansion of Operating Room Capacity: Mean-Variance Analysis of a Hospital’s Portfolio of Surgeons

Franklin Dexter, MD PhD^*, and Johannes Ledolter, PhD

*Department of Anesthesia and College of Business, University of Iowa, Iowa City

Address correspondence and reprint requests to Franklin Dexter, Division of Management Consulting, Department of Anesthesia, University of Iowa, Iowa City, IA 52242. Address e-mail to Franklin-Dexter{at}UIowa.edu

Surgeons using the same amount of operating room (OR) time differ in their achieved hospital contribution margins (revenue minus variable costs) by >1000%. Thus, to improve the financial return from perioperative facilities, OR strategic decisions should selectively focus additional OR capacity and capital purchasing on a few surgeons or subspecialties. These decisions use estimates of each surgeon’s and/or subspecialty’s contribution margin per OR hour. The estimates are subject to uncertainty (e.g., from outliers). We account for the uncertainties by using mean-variance portfolio analysis (i.e., quadratic programming). This method characterizes the problem of selectively expanding OR capacity based on the expected financial return and risk of different portfolios of surgeons. The assessment reveals whether the choices, of which surgeons have their OR capacity expanded, are sensitive to the uncertainties in the surgeons’ contribution margins per OR hour. Thus, mean-variance analysis reduces the chance of making strategic decisions based on spurious information. We also assess the financial benefit of using mean-variance portfolio analysis when the planned expansion of OR capacity is well diversified over at least several surgeons or subspecialties. Our results show that, in such circumstances, there may be little benefit from further changing the portfolio to reduce its financial risk.

IMPLICATIONS: Surgeon and subspecialty specific hospital financial data are uncertain, a fact that should be taken into account when making decisions about expanding operating room capacity. We show that mean-variance portfolio analysis can incorporate this uncertainty, thereby guiding operating room management decision-making and reducing the chance of a strategic decision being made based on spurious information.

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