A real options approach for evaluation and justification of a hospital
information system
C. Okan Özogul a, E. Ertugrul Karsak b,*, Ethem Tolga b
a HAVELSAN, Mustafa Kemal Mah., Ankara 06520, Turkey
b Industrial Engineering Department, Galatasaray University, Ortakoy, Istanbul 80840, Turkey
a r t i c l e i n f o
Article history:
Received 18 April 2008
Received in revised form 1 July 2009
Accepted 1 July 2009
Available online 10 July 2009
Keywords:
ERP investments
Hospital information system investment
justification
Real options
Compound options
Option valuation models
a b s t r a c t
Nowadays healthcare organizations globally recognize the importance of investing in information technologies
to improve the quality of care delivery and reduce costs. The key drivers of healthcare sector
such as continuously improving healthcare standards and insurance systems have introduced new
requirements for hospitals, which in return provided a solid ground for decision-makers to consider
implementing hospital information systems that are customized and improved versions of enterprise
resource planning (ERP) systems designed according to the needs of the healthcare sector. The conventional
discounted cash flow methods ignore the value of managerial and strategic flexibility inherent
in these investments, which is crucial for justification of the investment decision. This study introduces
a real options-based methodology which overcomes the limitations of traditional valuation methods and
enables decision-makers to value an ERP system investment incorporating multiple options. The option
valuation model developed in this study extends the binomial lattice framework to model a hospital
information system (HIS) investment opportunity with compound options. The potential application of
the proposed model is illustrated through evaluation of a real-world HIS investment.
2009 Elsevier Inc. All rights reserved. |
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