Create a Decision Tree Using the Scenario Scenario The Neigh

Create a Decision Tree Using the Scenario.

Scenario^†

The Neighborhood Medical Group (NMG) is a small primary care medical practice in Seminole County consisting of two physician owners as well as multiple advanced practice nurses and physician assistant employees plus clerical staff. NMG currently leases office space that is just sufficient for its staff but the lease is up for renewal soon. NMG can renew its lease for no net change in costs or revenues but also has found two additional office spaces they can lease. The first has room for two additional providers (physicans, APRN, or PA) plus staff and would cost $30,000/year ($30k) more than their current site. The second has room for four additional providers plus staff and would cost $50k/year more than their current site. Leases are long term so the decision the group makes should be considered final with respect to the planning horizon.

The two owners of NMG feel that with the recesion settling down and the housing market heating up that there is strong potential for population growth in their service area. In fact, the owners estimate that even with potential new competition entering the market they have the following probabilities of realizing changes to their demand for provider services. However NMG can only take advantage of the increased demand if they have the additional staff to handle the demand.

NMG can hire additional physicians and APRN/PA staff as employees if it has space for them. State regulations require that there must be one physician in the practice for every two APRN or PA staff and NMG is currently maxed out with APRN/PA staff so if they hire the next provider must be a physician. They could then hire up to two non-physician providers until they have to hire another physician to expand. After salaries and other personnel-related costs NMG believes that additional physician providers would contribute $20k/year each in revenue and new non-physician providers would contribute $30k/year each.

^† This scenario was constructed to be plausable and to have the mathematical and logic properties I wanted for the assignment. Do not get excited if it differs in detail from your experience with respect to regulatory or cost details.

Assignment

Create a decision tree from the above scenario include outcome values measured as changes to current revenue where some of your outcome values are certain to be negative.

Calculate the expected value of each decision option and annotate each as shown in the video and the module.

Identify which decision provides the highest payoff using a maximum expected value decision rule. Briefly explain why you selected this answer. (Use a text box on your drawing page underneath your drawing to do this.)

Do not consider any of the new information in Part II below in your Part I answer.

Part II (multi-Stage Decision Tree)

Add a second drawing, which Assume that NMG can immediately sublease any or all additional spaces in a larger facility for $10k/year per leased space. The decision to sublease must be made immediately after the decision to lease a larger facility (so there is no opportunity to find out if demand for NMG\'s services will grow before the sublease decision is made). The sublease would be for a multi-year period and would preclude NMG from using the space for its own staff in the short run. However, in the long run a sublease would give NMG the ability to eventually reclaim the space after demand for its services has been realized. NMG values this flexibility at $2k/year per subleased space so that the total benefit to NMG for each subleased space is $10k + $2k = $12k.

Note that the sublease decision differs between the three original lease opportunities. If a larger facility is leased NMG could elect to lease none through all of the new spaces.

Model the above situation (which includes all of the original scenario information) as a multi-stage decision tree

Show the cost values of each possible outcome as before but you will not solve the model.

Next, Solve the Part II model by indicating the expected value of each decision and identify the best course of action at the very beginning and briefly explain your recommendation. Do this on the same drawing you used for Part II but change the font to red for everything you added to the model strictly because of the bonus calculation.

Solution

To begin with NMG have three options: 1 No change and go for renewal of existing arrangement, 2. Go for the alternate that provide room for two additional providers, 3. Go for the alternate that provide room for four additional providers

Start Branch1-----No change (exixting renewal)

          Branch2-------Option to have two additional providers

            Branch3----------Option to have four additional providers

Branch2 will have additional outflow of $30K and additional inlow of $20K by hiring one physicion and $30K by hiring non-physicion. It is given that probability of two additional providers is .3 and that for one additional provider is .4. Branch2 have two sub branches namely to hire one additional or two additional providers. In case of one only choice is physicion and in case of two it should be one physicion and one non-physicion. In case of one additional provider (physicion) total favourable probability is .9(1-.1) and expected inlow will be $18K (20*.9). In case of two additional providers total favourable probability is .5 (1-.1-.4) and expected inflow will be $25K ((20+30)*.5). Hiring two additional is prefered over hiring one but even then the net result is loss of $5K as outflow is 30K against expected inflow of 25K.

Branch3 have additional cost of $50K with room for four additional providers.Options or sub branches are for 1 or 2 or3 or 4 additional providers. Expected inflows for first two options are same as mentioned above for branch2. Third option is to hire one physicion and two non-physicions with favourable probability .2 (.15+.05) and expected inflow $16K ((20+30+30)*.2). Last option is for hiring four providers, two physicions and two non-physicions as per conditions laid and expected inflow is $5K ((20+30+30+20)*.05). Here again outflow of $50K is far excess than expected inlows.

Therefore the best option is to renew the existing arrangement, in other words no change is preferred.

I am not awre about the video and module