Introduction: Special issue on engineering economic models in health care systems

Dear Colleagues,

In this issue, we explore the opportunities for engineering economists to help address some of the challenges of health care systems, one of the largest segments of gross domestic product for developed countries. The health care system is a complicated network of patients, providers, and payers, and particular challenges in the area include costing, for which few providers can accurately estimate, and the role of financial incentive programs such as pay for performance and shared savings. In addition, engineering economics can help drive capital investment decisions for providers and estimate the effectiveness of an intervention or technology from a societal perspective.

The following five articles demonstrate how engineering economics can make new and valuable contributions in the modeling and analysis of healthcare systems. In particular, at least one article from the set covers the areas of activity costing, capital investment, financial incentives, and cost effectiveness analysis.

In “Optimizing capital investments under technological change and deterioration: A case study on MRI machine replacement,” des-Bordes and Büyüktahtakın focus on the parallel asset replacement problem using two assets as an example: a full body magnetic resonance imaging machine and a smaller extremity machine. The authors develop a multi-objective mixed integer programming formulation to solve this multiple style and type parallel asset replacement problem. They perform computational experiments to illustrate optimal replacement strategies and find that technological advances reduce total cost, whereas deterioration increases both penalty and replacement costs. Sensitivity analysis shows that budget and demand are key parameters in the analysis.

In “A general model to compute activity-based waste disposal costs for health care products,” Vanberkel and Moayed develop a framework for measuring and evaluating hospital waste disposal activities using activity-based costing (ABC). Costs are associated with each waste stream at a level of detail such that complete disposal costs may be computed for a given stock keeping unit. The authors illustrate the approach using data from a women's and children's hospital in Nova Scotia, Canada. They also present resulting managerial insights relating to identifying priority products, employee engagement with correct disposal strategies, and influencing purchasing decisions.

In “The volunteer's dilemma and alternate solutions for ensuring responsibility within accountable care organizations,” Bettinger and Benneyan discuss the social dilemma that can result when providers in an accountable care organization can act to achieve financial incentives that benefit everyone in the accountable care organization through defined quality measures, yet if no provider acts, then all providers disbenefit. The authors use a game-theoretic framework to characterize this dilemma for the case of the 30-day readmission rate as the quality measure. They show that the three economic mechanisms of reassigning interventions, outsourcing interventions, and using penalties can ensure appropriate action. An example is provided as a means of illustration along with implications for current practice.

In “Time-driven activity-based costing for health care provider supply chains,” Gonzalez, Nachtmann, and Pohl develop a method for a health care provider supply chain to accurately measure their process operations costs through time-driven activity-based costing (TDABC). This approach enables a health care provider supply chain to analyze its cost behavior in order to identify potential areas for process improvement. The authors illustrate the approach using data from a 200-bed not-for-profit U.S. hospital. Further, they discuss how TDABC allows for activities to have multiple time drivers, which can better capture complexity compared to traditional ABC approaches.

In “Evaluating the cost-effectiveness of an early detection of Parkinson's disease through innovative technology,” Muñoz, Kilinc, Nembhard, Tucker, and Huang project the cost-effectiveness of a nonwearable sensor-based telehealth technology for the early detection of Parkinson's disease. The authors measure health gains through the use of quality-adjusted life years (QALYs) and compare alternatives through the incremental cost-effectiveness ratio. Parkinson's disease progression is characterized by five stages, and resulting QALY estimates for each stage came from previous literature. The authors find that using the technology in community settings such as health fairs and pharmacies is cost-effective using $50,000 per QALY saved as a threshold.

As a group, these five articles indicate the potential for engineering economics to contribute to improving health care systems. There are several additional opportunities. One example is quantifying the impact of medical outcomes in a cost–benefit analysis. A second example is the development of health analytics methods to help lower costs, particularly for a portfolio of shared resources. Engineering economics can also help quantify the relationship between determinants of health and associated policies to help organizations and/or governments prioritize their actions. Finally, health and wellness is in large part defined for an individual by his or her decisions and actions and hence a framework for describing behavior in engineering economics models for health care is needed. These are just a few such possibilities.

It has been a pleasure to serve as guest editor for this issue. We are very grateful to the reviewers for their thoughtful comments. We look forward to seeing future articles in engineering economic models in health care systems published in The Engineering Economist.

Sincerely,