HA 640 Unit 5 make or buy analysis example

Send It Out or Run It Here: A Make or Buy Analysis for Vitamin D Testing, Built on Identical Assumptions and a Break-Even of 1,550 Tests a Year

Student Name

Health Care Administration, Herzing University

HA 640: Healthcare Operations Assessment and Decision-Making

Instructor Name

February 12, 2026

Send It Out or Run It Here: A Make or Buy Analysis for Vitamin D Testing, Built on Identical Assumptions and a Break-Even of 1,550 Tests a Year

The Decision

The core laboratory sends 25-hydroxyvitamin D tests to a national reference laboratory, about 9,600 tests a year or 26 a day. The laboratory's immunoassay analyzer, installed last year, can run the test, and the reference laboratory's contract renews in June. The question is whether to keep buying the test or to bring it in-house. Both options below are costed on identical assumptions: 9,600 tests a year, current wage rates, and the same one-year period. The analysis also notes what the decision means for the specimen processing bench, the constraint identified earlier in the term.

The External Option, Costed in Full

The quoted price is only the start.

The Internal Option, Costed in Full

Overhead is counted only where the test genuinely consumes it. The analyzer, space and information system already exist and are not fully used; running the test adds no rent, depreciation or interface cost. An allocation formula would assign a share of those costs to the test, but the hospital's cash spending would not change, so they are excluded.

Break-Even Volume and Annual Result

Separating fixed from variable costs on both sides allows a break-even volume. Break-even = (internal fixed − external fixed) ÷ (external variable − internal variable) = ($12,879 − $1,650) ÷ ($11.47 − $4.22) = $11,229 ÷ $7.25 = about 1,550 tests a year.

At the current 9,600 tests, the external option costs 9,600 × $11.47 + $1,650 = $111,714 a year, and the internal option 9,600 × $4.22 + $12,879 = $53,391. Bringing the test in-house saves about $58,300 a year. Volume would have to fall by more than 80% before buying became cheaper; at 6,000 tests, savings would still be about $32,000, and at 4,000 about $18,000.

Sensitivity to the Least Certain Inputs

Three inputs deserve testing. If the reagent price rose 30% at the next contract, the internal variable cost would rise to about $5.39 and the saving would fall to about $47,000 a year. If the reference laboratory, facing the loss of the business, cut its price to $7.50 a test, the saving would still be about $36,700. If every internal fixed cost ran 25% over estimate, the break-even volume would rise to about 1,990 tests, still a fraction of current demand. No plausible combination of these changes reverses the answer.

One cost of the external option is hard to measure but real: the work that returns to the laboratory when the vendor misses. In the past year, the reference laboratory's results were late on 11 days, each producing calls from clinics that the laboratory's staff answered and specimens that had to be traced. That work is not included in the figures above, so the external cost is, if anything, understated.

Factors That Resist Pricing

Turnaround and control. The reference laboratory returns results in two to three days; in-house testing would return them the same day. For a test used mainly for outpatient and chronic care decisions, faster results matter less than for acute tests, but they avoid repeat visits and calls about missing results.

Regulation. Because the test is approved by the Food and Drug Administration and unmodified, the laboratory must verify accuracy, precision, reportable range and reference intervals before reporting patient results, under the federal laboratory rules (42 C.F.R. § 493.1253). It must also enroll in proficiency testing and maintain staff competency. These obligations are already met for other tests on the same analyzer, and their costs are included above.

Supply and continuity. In-house testing depends on reagent supply from a single manufacturer; a backorder would force a temporary return to send-out, which the laboratory can do at short notice because the reference contract can be kept active for backup at no fixed cost.

Staffing. The test adds about 13 minutes a day of scientist time for loading and verification and 15 minutes for quality control review. That fits within existing afternoon staffing, when scientists are least busy.

Effect on the constraint. Send-out handling currently takes about 65 minutes of processor time a day, almost all in the afternoon. Bringing the test in-house frees that time, but not during the 5 to 7 a.m. peak, so this decision does not relieve the morning constraint. It is worth making on its own merits, and it should not be presented as a solution to the morning problem.

Recommendation

Bring 25-hydroxyvitamin D testing in-house, beginning after method verification in May, before the reference contract renews in June. Keep the reference contract active as a backup. The recommendation rests on a saving of about $58,000 a year, same-day results, and a break-even volume far below current demand. The cost comparison follows the principle that decisions should rest on the costs a choice actually changes rather than on allocated averages (Kaplan & Porter, 2011). Error rates during the first three months will be monitored against the reference laboratory's, since errors in the testing process are a patient safety matter as much as a cost one (Plebani, 2006).

References

Kaplan, R. S., & Porter, M. E. (2011). How to solve the cost crisis in health care. Harvard Business Review, 89(9), 46-52.

Plebani, M. (2006). Errors in clinical laboratories or errors in laboratory medicine? Clinical Chemistry and Laboratory Medicine, 44(6), 750-759. https://doi.org/10.1515/CCLM.2006.123

Standard: Establishment and verification of performance specifications, 42 C.F.R. § 493.1253 (2025).