Real Options Reasoning in Healthcare: An Integrative Approach and Synopsis

Abstract

For the past 40 years, practitioners and researchers alike have been grappling with the natural shortcomings associated with the net present value approach to strategic decision making and capital budgeting. Work by scholars in option pricing theory has evolved into an alternative perspective on strategic capital investments, called "real options." Proponents of real options argue that this is a superior way of approaching decision making and capital budgeting, compared with other approaches, as it allows for greater strategic flexibility and encourages exploration, experimentation, and innovation. Within the healthcare literature, articles on real options have focused on pricing these options. This article is unique to the healthcare literature as it emphasizes the cognitive or strategic aspects of real options. Additionally, this article integrates two techniques for applying the real options approach for interested practitioners using a hospital's imaging department as an example, while providing scholars with additional applications and questions for future research. For practitioners, the implications are that thinking of and planning for capital investments as real options may create greater strategic and operating flexibility than other, more traditional approaches.