HLTH 4383 Module 5 Investment Recommendation Example

Buy the Robot or Pay by the Case: A Net Present Value Recommendation on Robotic-Assisted Knee Surgery for an Ambulatory Surgery Center

Student Name

American College of Education

HLTH4383: Finance for Healthcare Administrators

Module 5 Assignment

Instructor Name

November 2, 2026

The Decision

Nine months into its joint replacement program, our composite ambulatory surgery center has received a proposal from two orthopedic surgeons in a competing group. They perform about 70 primary knee replacements a year at a hospital across town and have told the administrator in a letter of intent that they would move those cases to the center if it offered robotic-arm assisted surgery, which both use routinely. The center's contracted implant vendor makes a robotic system that works only with its own knee implants, and it has offered two ways to acquire it: an outright purchase for $1,050,000, or a placement agreement under which the center pays nothing up front and $1,500 per robotic case, with a minimum of 100 robotic cases a year beginning in the second year.

The board has asked for a financial recommendation. This paper compares the two options with the status quo, in which the center declines and the surgeons stay where they are, over five years using net present value.

Method and Assumptions

Net present value brings each year's incremental cash flow back to today's dollars at a required rate of return, adds those values and then takes away what must be spent at the start; when the result is above zero, the project returns more than the required rate (Penner, 2017). The health system that owns a majority of the center requires an 8% return on capital projects, which is used here. Only incremental cash flows count: cash that exists because of the decision and would not exist otherwise.

Payers pay the same facility fee whether or not a robot is used, so the robot brings no additional revenue per case. Its financial case rests entirely on new cases. The surgeons' 70 cases are assumed to arrive at 40 in the first year and 60 in the second, reaching 70 in the third through fifth years. Each new case contributes the program's $4,586 margin less $750 in robotic disposables and $60 of added operating room time, or $3,776 under the purchase option. To meet the vendor's minimum, the center's own surgeons would use the robot for about half of their 110 annual cases, which adds costs to cases the center already performs. Once total knee volume passes about 150 a year, a third evening recovery shift is needed, at $18,500 a year.

Option One: Purchase

Buying the system costs $1,050,000 now. The first year includes the warranty, and a service contract of $110,000 a year applies from the second year. Robotic use by the center's own surgeons adds $44,550 a year in disposables and time, and staff training costs $15,000 in the first year. Net incremental cash flows are therefore $91,490 in the first year, $53,510 in the second, when the service contract and third recovery shift begin, and $91,270 in each of the third through fifth years.

Discounted at 8%, those flows are worth about $332,200 today. Once the $1,050,000 outlay is taken away, the purchase is left about $717,800 below zero. The undiscounted flows over five years total only about $418,800, so the purchase would not pay back its cost within the analysis period, or even within a seven-year equipment life. Seventy cases a year cannot carry a million-dollar machine when payers pay nothing extra for it.

Option Two: Per-Case Placement

Under the placement agreement, the center avoids the capital outlay and the service contract but pays $1,500 per robotic case. Each new case then contributes $3,026, and the center's own robotic cases cost $1,560 each in fees and time, or $85,800 a year for 55 cases. Net incremental cash flows are $20,240 in the first year, after training, $77,260 in the second and $107,520 in each of the third through fifth years. Their present value at 8%, with nothing invested up front, gives a net present value of about $322,500.

The placement option turns a large loss into a gain because it converts a fixed cost into a variable one: the center pays only when the robot is used, so its risk falls if volume disappoints. The price is a higher cost per case and a commitment to the vendor's implants for the length of the agreement. It also protects the center's cash. The first module found only about 27 days of cash on hand, and financing a $1,050,000 purchase over five years at 6% would add loan payments of roughly $250,000 a year, several times the purchase option's annual cash inflow in its early years.

What Could Change the Answer

The placement result depends on the new surgeons actually moving their cases. If they bring only half, 20, 30 and then 35 cases a year, the center would fall short of the 100-case minimum and pay $1,500 for each missing case. Recalculated, the net present value becomes about negative $41,000. The option is therefore sound only if the surgeons commit to their volume in a signed agreement rather than a letter of intent.

Published evidence points the same way. Hua and Salcedo (2022), modeling robotic-arm assisted knee replacement in the Medicare population, found it cost-effective at a threshold of $50,000 per quality-adjusted life-year in the base case, but the result was most sensitive to annual procedure volume and held only above about 49 procedures a year. Their analysis took a payer perspective, in which fewer revisions and lower post-acute costs count as savings, whereas this center captures none of those savings directly. That difference is why the center's own analysis must rest on volume.

Nonfinancial Considerations

The decision has consequences the numbers do not capture. Adding two surgeons increases the center's orthopedic volume by more than half and strengthens its position with commercial insurers. The placement agreement ties the center more closely to one implant vendor, which supports the single-vendor contract that reduced implant costs, a pattern Boylan et al. (2019) documented when a preferred-vendor program lowered per-case implant costs without worsening readmissions or infections. On the other hand, the center's own surgeons have not asked for the robot, and requiring them to use it for half their cases to meet a vendor minimum could strain relationships with the owners who built the program. Their agreement should be obtained before signing.

Recommendation

The center should decline the purchase and accept the placement agreement, subject to three conditions: the two surgeons sign a volume commitment of at least 60 cases a year with the center; the agreement includes an exit clause after two years if robotic volume falls below the minimum; and the center's own surgeons agree to the planned level of robotic use. If any condition cannot be met, the center should decline both options, since the status quo costs nothing and the program is already profitable. Results should be reviewed after 12 months against the volume, cost per case and cash flows projected here.

References

Boylan, M. R., Chadda, A., Slover, J. D., Zuckerman, J. D., Iorio, R., & Bosco, J. A. (2019). Preferred single-vendor program for total joint arthroplasty implants: Surgeon adoption, outcomes, and cost savings. The Journal of Bone and Joint Surgery, 101(15), 1381-1387. https://doi.org/10.2106/JBJS.19.00008

Hua, Y., & Salcedo, J. (2022). Cost-effectiveness analysis of robotic-arm assisted total knee arthroplasty. PLOS ONE, 17(11), Article e0277980. https://doi.org/10.1371/journal.pone.0277980

Penner, S. J. (2017). Economics and financial management for nurses and nurse leaders (3rd ed.). Springer Publishing.