ROI in Healthcare

William HymanWilliam A. Hyman
Professor Emeritus, Biomedical Engineering
Texas A&M University,
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The usual meaning of Return on Investment (ROI) in purely financial transactions is how much money do you get back for the amount of money you put in. It is usually desirable for the amount returned to exceed the amount invested, thus achieving a positive ROI. In healthcare this concept requires modification because of who may receive the benefit and whether or not that benefit is monetary. Here our concern is usually investments in IT, although there are many other possibilities such as medical devices. In some hospital “investments” there can be an internal positive return arising from lower costs or higher income. For example, an early patient discharge may directly save the hospital money, especially when the care has a fixed reimbursement regardless of days-of-stay. Investments that increase through-put can also produce direct increases in income, provided the patient que can be kept filled. New services can also increase income which might or might not exceed the cost of providing those services.

This basic ROI concept can become complicated in at least two ways. One is when the person receiving the return is not the person who originally invested. In healthcare this can arise when the hospital invests in new IT and that IT results in patients being treated at lower cost. Depending on the reimbursement model that lower cost may accrue to either the hospital or the patient. If it is the hospital then the reduction in cost is a return on the IT investment. But if the savings is realized by the patient (or a third party such as an insurance company) then the hospital spent money and the patient or third party saved money. In non-medical commerce this would not be a directly positive ROI. However, in healthcare this may be considered as a positive net outcome in the non-fiscal sense, even though the hospital spent money that it didn’t directly get back. It is an irony of healthcare that the more you helped the patient the less likely they are to need your services again. There are few other businesses whose underlying conceptual goal is to keep the paying customers from coming back.

When someone other than the hospital benefits It might be possible to dig deeper and find a positive cash outcome. Reduced readmission rates might lower CMS penalties and thereby generate real income. Or CMS bonuses might be obtained under what was Meaningful Use and is now Promoting Interoperability. Reduction in FTEs and/or overtime might mean real cost savings. On the other hand, the same number of FTEs doing less work is not a savings, unless their time can be effectively reallocated. Also, if patients are pleased by lower out-of-pocket cost they might choose the same hospital the next time around (where there actually are alternatives) thereby increasing the hospital’s overall patient care income. Or they might tell their friends which might drive more patients to the hospital. This is the essence of the value of patient satisfaction to both the patient and the hospital.

A second complication in healthcare ROI arises when the benefits arising from the investment made are not monetary. For example, if a hospital invests in new IT and the patient has a better outcome then overall this is a good thing, but the money investment did not create a monetary return. To determine a conceptual ROI in this case it would be necessary to monetize the better outcome and then compare the hospital’s cost to the patient’s monetized benefit. But there is no systematic way to assign dollar value to general outcome benefits. Does less pain have a cash value? And even if this could be done we would still have the hospital spending the money and the patient receiving the added benefit. The same type of questions arise in determining the “value” of a drug.

Healthcare ROI requires a clear picture of who spent the money, how it was that the expenditure was supposed to be beneficial, who it is that benefited, and how they specifically benefited. Such benefits might be immediate and direct, or secondary and occurring over a longer period. If the benefits are not monetary then further consideration has to be given to how a value will be put on those benefits. For new projects with an expected ROI these considerations should be resolved in advance if the ROI is actually going to be measured. In this regard, most investments have a predicted positive value or they wouldn’t be undertaken. Whether that value is actually achieved often receives less attention. This may be because the money is already spent so why bother. Or we have moved on to the next wonderful initiative and the prior initiative is now old news.