Abstract In my previous position I worked as the Administrator for a well-established outpatient diagnostic imaging facility. As the Administrator I was faced with having to make various decisions that utilized economics on a daily basis. The decisions that I would have to make would range from very simple to very complex purchases. Regardless of the amount of the purchase the same economic considerations were utilized prior to any purchases. Introduction In my previous position as Administrator for an outpatient imaging facility I was faced with various daily decision making tasks that would range from something as simple as a supply order that would cost the company a few hundred dollars, to the decision of final equipment purchases that could cost over a million dollars. One particular instance that I was faced with was to utilize additional space within the facility for a different imaging modality. The decision at the time was not completely left up to me, but was my responsibility to present which modality I thought would benefit the company and our patients the most, and how the best options to move forward with overseeing this project. The facility offered various imaging services such as a positional stand up MRI, nuclear imaging, ultrasounds, and high quality x-rays. The new project was to fill the additional imaging room with a service based on my analysis. The options that I had were to bring in a new device to see a different set of patients, or to accommodate the high demand of MRI’s our facility saw each day and purchase another MRI machine to enable the business to complete twice as many MRI exams. Over the course of three months I conducted various studies within the market to come to a final conclusion of the type of modality to purchase. The best option would be to be able to offer CT scans, and ultimately purchase a CT modality. As I was moving forward with preparing the presentation of why and how this project would come together I found that for an additional cost we could purchase a PET/CT scanner that would allow us to not only conduct two additional modalities with one scanner, we would also be able to enhance PET scans by combining them with CT scans (which was a great benefit to many oncologist who would send patients in for cancer scans). The decision now would be if the company should pursue the new CT scanner or a used PET/CT scanner.
Executive Summary Through the decision process and thorough analysis I chose to present the purchase of a used PET/CT scanner to occupy the empty exam room. In order to reach this decision the evaluation of cost benefits, and opportunity costs were considered. Extensive research was conducted within the market to understand the demand of the scanners, as well as understanding the current supply of this scanner within a specific radius from varied competitors. Understanding these concepts would be key in presenting this option, especially since it would add an additional cost $700,000.00 to the alternative purchase of the new CT scanner. The additional benefits of this modality, with supporting demographic data, would have to be included in the presentation to justify the additional cost, and for the CEO to understand why this would benefit the company, as well as its patients.
Definition
The modality presentation provided information regarding the alternatives that the company could have chosen and what benefits those alternatives would bring. The presentation compared the chosen PET/CT modality to the other options and the purposes to why this would be the better choice for the business, and its profit margin. The other opportunities would need to be outlined so that the CEO would understand what other modalities were researched and reviewed, and why they were not selected as the chosen modality. The options that were presented were purchasing another MRI, a new CT scanner, a used PET/CT scanner, or to not purchase a modality at this time and wait until the following fiscal year to purchase a new PET/CT machine.
Measurements
The option of purchasing an additional new MRI scanner would cost the facility 1.2 million dollars and would be able to facilitate the current demand for MRI scans the facility received on a daily basis. The current MRI scanner was able to scan an average of twenty patients per day, but the facility was receiving enough doctor referrals to scan an average of thirty patients a day. Even though the demand was not double the company would be able to facilitate their demand by offering an additional supply of scans, and leave room for potential growth for additional daily scans. The average insurance reimbursement for MRI scans is three hundred and fifty dollars. If the facility purchased an additional MRI scanner and scanned ten additional patients per day (Monday thru Friday) the facility would increase their MRI scans by approximately two hundred per month and increase their monthly gross income by $70,000.00
Purchasing the new CT scanner would cost the company 1.3 million dollars. Since the facility did not previously offer CT scans we were unable to predict the demand our facility would see, but had researched the current market demand, and competitors who supplied this modality. The market demand was an average of two thousand CT scans per month. During this time there were six other CT scanners within the local area. Assuming that each competitor received an equal share of the CT referrals adding a seventh CT scanner would mean each of these modalities would scan approximately two hundred eighty six patients per month. The average insurance reimbursement for CT scans was approximately $250.00. This would increase the facility’s monthly gross income by $71,500.00. The modality has the capability to scan up to 50 patients per day. If the demand increased our facility would be able to accommodate approximately 1000 scans per month which would increase the monthly gross income by $250,000.00. Purchasing a used PET/CT machine would cost the facility 2 million dollars. Since the company could not offer PET, CT, or PET/CT previously we were unable to predict the demand that our facility would see. While researching the market we found that this modality was not offered in our market. Our competitors offered PET and CT separately, but did not have the ability to offer the two comparative exams at the same time. This modality would enable our facility to scan PET only, CT only, or the combined PET/CT. As previously stated we understand the market demand for CT could possibly provide our facility 286 scans, assuming they were split evenly within the market. The demand for PET scans within the area was currently about 1500 per month, and only 3 competitors offered this modality. The average insurance reimbursement for PET scans is approximately $3,000.00. Assuming that each competitor received the same amount of scans per month we could expect to see approximately 350 scans per month. If the facility just utilized the PET portion of the scanner only it could assume an increase in their monthly gross income by over a million dollars. The average insurance reimbursement for a PET/CT scan is also an average of $ 3,250.00. We could not measure a demand for PET/CT since it was not offered in our market. This would have to be a demand that our marketing team would have to create. The final option that was presented was to wait for the following fiscal year to purchase a new modality. This would provide the company the opportunity to evaluate the market more thoroughly, and would provide them additional funds to invest in a new PET/CT as opposed to the used PET/CT. The new PET/CT scanner would cost the company 3 million dollars, but would be far more advanced, and provide the scans in half the amount of time that the used PET/CT conducted them.
Costs
The cost benefit of purchasing the MRI is that the demand for the MRI scans from our facility is already available, and currently not being met. The investment of the 1.2 million dollars to purchase the MRI modality would begin to see income from the moment it was running. It would also provide the opportunity for the facility to increase the number of MRI patients to fill the schedule for the new modality. The marketing team only maintained the MRI referrals, but this purchase would allow them to attempt to increase the number of these scans for the facility. The market demand would not be affected by this purchase, but the supply would be. This purchase would increase the number of scans available to be conducted. This would affect the pricing for the private pay patients in order for the market to stay competitive since the supply increases but the demand does not. The opportunity cost of purchasing the MRI machine is the facility would be potentially giving up higher monthly revenues, but the company already has the additional demand for the MRI scans that can be expected, and not assumed. The cost benefit of purchasing the new CT machine is that it could potentially bring in a higher monthly gross income for the company. We know that the demand is available, but the marketing team would have to invest resources and time to win over a portion of this demand. With the medical imaging industry it can take months before doctors choose to refer their patients, but many of the doctors that were referring their MRI patients to our facility could refer their CT patients to our facility. The relationship our company had with these doctors could generate patients immediately. The issue is that there is no guarantee of when the company would receive these referrals, if at all. This purchase would not affect the market’s demand, but would increase the supply. The opportunity cost of purchasing the new CT scanner would be that they would be giving up guaranteed income for the gamble of obtaining more per scan to generate higher monthly revenues. The cost benefit of purchasing the used PET/CT scanner is that it could potentially increase the facility’s gross monthly income by a great deal. This modality would be an additional investment of $700,000.00, but has the opportunity to make this difference back within a month if they were able to obtain the assumed portion of the market demand. This purchase could affect the market demand since this modality is not available in the local market, and could generate a demand of doctor referrals once the marketing team is able to educate them on the benefits. There is no guarantee that this would take place, but the opportunity to generate a new demand is available. The opportunity cost of purchasing this modality is that the facility would be giving up guaranteed income for the chance to generate a large increase in their monthly gross income. The cost benefit of waiting till the following year to purchase a new modality is that the company would not be spending, at minimum, 1.2 million dollars. There would be no change in demand or supply within the market, and the company could not expect to see a change in the monthly gross income. The opportunity cost of doing this is that the company would be giving up additional revenues immediately for the chance to purchase a new faster modality, with a warranty, within the next year.
Analysis
Based on the information that was gathered I found that it would be in the company’s best interest to increase the investment willing to purchase the used PET/CT scanner for the empty exam room. My analysis is that even though the demand does not currently exist in the market for the combined PET/CT scans, there is a demand for PET and CT scans that can be conducted while the marketing team attempts to generate a demand for the combined PET/CT scans. The potential revenue that the modality can generate from either PET or CT would benefit the facility, but even more so if the focus was on the $3,000.00 PET scans. It may take some time to gain some of the market, and obtain some of this demand, but I was confident that the doctors would refer these exams to our facility since they already respected our staff and radiologists with the modalities that we currently serviced them with.
Summary
The CEO agreed that the risk was worth the additional investment. Our facility was already established within the market, and many of the doctors that already referred to the modalities that we offered had the referrals for PET and CT scans, and our reputation with these doctors would assist in gaining a portion of the market’s demand of PET and CT scans. We were confident that we would see referrals within the first two months of installing the new modality, and over the course of time would obtain a larger amount of the PET referrals as our marketing team began to educate the doctors on the benefits they would provide to their patients by being able to conduct a PET and CT scan at the same time. The benefits of this modality would be seen by our facility, referring doctors’ offices, and the patients because the quality of this type of scan would assist in diagnosis of cancer that may have not been able to be diagnosed on a PET scan alone. This way all parties would benefit from our facility’s purchase.

References
Thomas, C. & Maurice, C. (2011) Managerial Economics-Foundations of Business Analysis and
Strategy.(10th ed.) New York: Irwin/McGraw-Hill.