With the growing interest in and number of applications of “Value-Based” purchasing and management of healthcare, the need to define and measure what we mean by value becomes paramount.  The challenge is quite different in “reactive sickness care” as opposed to “proactive health care”, though there is some overlap between them.  By definition, value represents the “good for the bad”, or benefits for the costs, but the question has never been settled as to whether this means the net of benefits minus costs, or the ratio of benefits divided by costs.

One of the reasons this question is mainly ignored is that in most cases, the only possibility is benefits divided by the costs, the ratio of the good vs. the bad, because benefits are measured in one “currency” and costs in another.  In sickness care, benefits are defined as improvements in health measures, restored function, and similar non-financial terms, while costs are measured in dollars.  Hence only ratios such as “quality life years gained per dollar” can be used to set a value on care.

In proactive health care, benefits are defined in terms of reductions in sickness care costs, in absences and productivity impairment among workers, and even in improved quality, customer satisfaction, and new business attributable to healthier and happier employees.  These usually come first, because when employers seek value from proactive health investments, they are looking at their own economic benefits, primarily, since they voluntarily assume the costs of achieving them.

Since both the benefits and costs of proactive care can be measured in exactly the same currency, namely dollars (or pounds, francs, deutschmarks, etc.) terms for both, the question of value as benefit minus cost or benefit divided by cost is a significant one, since both can be measured.  Despite this, for some reason, the most common approach to defining and measuring the ROI of proactive health investments is benefits divided by costs, the ROI ratio, rather than benefits minus costs, or net gain.

The vast majority of reports, particularly by suppliers of proactive health services, use ROI ratios in describing their success.  For marketing purposes, this probably makes sense, since any prospective client, whether insurance plan or employer, can calculate what a particular investment might yield, while considering different levels of investment.  But the ROI ratio is far less useful in planning and evaluating proactive health investments than is the difference between benefits and costs, namely the net gains achieved.

When proactive health programs were being marketed ten years ago, for example, they typically focused on the 20% or so of any insured or employed population that generated 80% or so of healthcare costs.  These were the members of the population that had chronic diseases, with predictable and often high risk/reward potential, depending on whether or not their conditions were well managed.  ROI ratios used in promoting investments in “disease management” (DM) for such members were often at least two to one, equivalent to “interest rates” of 100% per year.

Clearly any investment that yields even 100% interest per year (“doubling your money”) would be deemed a marvelous opportunity by almost any insurer or employer.  But the ROI ratio can cloud the issue when it ignores the net gain possible.  For example, if the same insurer or employer could gain a more modest 1.5 to 1 ratio with five times as many people and a five times greater investment, the net gain would be far more than would be investing less with a 2:1 ratio on a small minority.

DM investments, for example, are often hundreds, even thousands of dollars a year per participant.  By contrast, investments in health promotion and risk reduction are more often measured in tens of dollars per participant per year, or perhaps one or two hundred.  A combination of DM and health/risk management might be able to include five times as many people for only twice the costs for example.

Often, savings from non-traditional “diseases” chosen for their productivity impact rather than sickness cost, are often as great as are DM savings.  The latest “Productivity Dashboard” calculated by HealthMedia®, Inc. for example, shows savings per participant in a back pain management program of $4515, thanks to reducing their productivity impairment by an average of 9.03% each.  Because only 15% of employees reported such pain, the savings per employee are 15% x $4515, or $67.725 each. For an employer with 1000 employees, total savings would be $67,725.

By comparison, reported savings from a variety of seven DM interventions were only $1835 per participant, since productivity gains averaged only 3.67% per participant.  Thanks to the combined prevalence of all DM conditions being 42%, savings were $1835 x 42% = $77.07 per employee, or $77,070 for an employer with 1000 employees.  Regardless of the costs of both programs, the net gain from including at least these two programs would be almost double what would be saved through DM alone. [“HealthMedia® Productivity Dashboard” May 9, 2007]

As long as the ROI ratio for any proactive health investment under consideration represents an “interest rate” significantly better than currently secure bank rates, additional investments can be justified, as long as they significantly increase net gains.  When ROI ratios are high enough, firms could even borrow money to make the investment, and still end up ahead.  The net gain should be the first consideration, with the ROI ratio only serving to determine which investments make sense individually.