A real options approach for evaluation and justification of a hospital information system

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.