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1) Treating a patient with congestive heart failure with tPlex rather than Isother increases average life expectancy to 12

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1) Treating a patient with congestive heart failure with tPlex rather than Isother increases average life expectancy to 12.3 years from 11.5 years. The added cost of therapy is $14,000. What is the cost per life year? Should you choose tPlex or Isother? 

Using CEU

1. The increase in cost is $14,000

2. The increase in life expectancy is 0.8 years.

3. 14,000/0.8=$17,500 per life year gained.

2)A clinic finds that it can reduce costs by eliminating appointments. The clinic is able to eliminate some telephone staff, and physicians become more productive. Patients wait until the physician is available, so the physician has virtually no downtime. Does this analysis adopt a societal view of costs? Why might this analysis result in a bad managerial decision? 

3) Your firm sells backup generators to hospitals and the generators are guaranteed to operate on demand for two years. Your data show that the generators run an average of 42 hours per year. Your firm offers an extended warrantee that covers the next three years. Your data show that repairs are needed for 2 percent of units during this three-year period. When repairs are needed, the average cost is $4,000. You charge $400 for the extended warrantee, and about 20 percent of your clients buy it

1. The extended warranty has been a consistent money loser.  Claims average $1,000 per customer. How could this situation happen, given the data above?   HINT: adverse selection - Moral Hazard 
2. Would raising the premium to $1,000 solve this problem? HINT: Who would buy? Focus on usage
3. What would you recommend that your company do to solve this problem? HINT: Think about a maintenance contract :) 

4) Compared with a drip system, a new type of infusion pump reduces the cost of administering chemotherapy from $25 per dose to $20 per dose. The complication rate of each system is 2 percent. Which should you choose? What sort of analysis should you do?   HINT: We talked about something similar during in-class session.

5)Switching from one anesthesia drug to another reduces costs by $100 per patient. What additional information do you need to do a cost-minimization analysis? 

6)The current cost function for a lab that evaluates Pap smears is C = 200,000 + 25 ´ Q. Q, the annual volume of tests, is forecast to be 30,000. The incremental cost is $25 because each evaluation requires $20 worth of a technician’s time and $5 worth of supplies. Calculate the average cost of an evaluation.  Hint: You know how to calculate average cost :) 

7)You are comparing replacement of the current lab, which has a cost function of C = 200,000 + 25 x Q, with an automated lab that has a cost function of C = 300,000 + 20xQ. Doing so would reduce the error rate from 1.5 percent to 1 percent. Your volume is expected to be 18,000 tests per year. Should you choose the automated lab? Briefly explain your logic.