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Marginal Costs vs. Benefits of Measuring EHM Results

by Scott MacStravic

There is a valid argument for conservative approaches to measuring the results of employee health management (EHM) investments.  Among employers who at least go as far as formally measuring their return on investment (ROI) from EHM efforts, by far the most usual approach is to look only at healthcare, disability and workers compensation claims expense for savings.  These costs are routinely tracked and reported already, and if measurement shows positive, acceptable or admirable ROI levels, why bother to measure further?

Unfortunately, limiting measurement to only the “low-hanging fruit” of claims costs can grossly undervalue the total impact of EHM.  Employers that have measured other labor cost reductions — such as lower absence, presenteeism, and turnover – have found net savings that are two to five times as much as those of claims costs alone, averaging three times as great.  So any employer measuring only reduced claims costs may under-invest in EHM, even cease investing at all, in the mistaken conclusion that economic gains are not great enough.

Moreover, healthcare, disability and workers’ compensation cost reductions may take years to show up to their full potential, as long as five to seven years in some cases. [P. Gotcher & D. Gresky “How the Natural State (Arkansas) Achieved Supernatural Productivity Improvement” HealthMedia Engage, Apr 9, 2008 (www.healthmedia.com)] By contrast, productivity improvements through reduced absenteeism and presenteeism have been shown in as little as 30, and usually by 90 or 180 days.

Of course, it adds somewhat to costs to add measures such as absenteeism and presenteeism reduction.  If an employer wants to look even further in measuring results, by evaluating improvements in technical and service quality of workforce performance, increased customer loyalty and revenue, for example, measuring such results can add further to costs.  Merely discovering that productivity and performance measures have improved is one thing.  Achieving confidence that they have occurred at least partially, if not wholly, due to improved employee health gained by EHM investments is more complicated and likely to be more expensive.

Decisions regarding whether or not to measure productivity and performance gains, and make a case for them having been caused by EHM investments, can be made on the basis of the marginal costs of such measurement compared to the marginal benefits discovered thereby.  After all, there would be no added operating costs or fees charged by EHM suppliers, since there is no added EHM effort per se, only added costs of measuring what it is already achieving.  Even if the added measurement costs amount to hundreds of dollars per successful (improved) employee, the added benefits discovered should be in the thousands.

Of course, even if the ROI for measuring more outcomes achieved is positive and high, the costs of measuring, per se, add nothing by themselves.  The results achieved were always there – only the knowledge of them is being gained.  But this knowledge is likely to be worth far more than the costs of gaining it, since it will enable employers and EHM suppliers alike to gain essential insights into where the best investments are for the future, as well as into where improvements can be made in EHM interventions.

The biggest gain in added understanding of the value of EHM will likely come from identifying factors that are responsible for reduced productivity and performance, even if they do not cause much in the way of healthcare, disability and workers compensation claims expense.  Factors such as lack of sleep, smoking, alcohol abuse, unsafe lifestyles in general, poor nutrition and fitness, and particularly emotional problems that fall short of being diagnosed “diseases” can reduce productivity and performance far more than they add to healthcare costs.

Moreover, factors not directly related to health, such as employee motivation, job and life satisfaction, personal competencies and confidence, supervisor behaviors, pride and trust in their employers, for example, can affect productivity and performance far more than health does.  By focusing on improving productivity and performance, rather than just claims costs, employers and EHM suppliers can end up improving workforce, and thereby the employer’s performance, far more than EHM per se, by integrating EHM with other means, such as pay for performance, performance management, etc.

While measuring the full impact of EHM investments may add significantly to costs, particularly if the employer is a stickler for accurate, precise, and rigorous evaluation, it will can add dramatically to the overall operational intelligence available to employers.  By integrating EHM with value-based benefit design, and a holistic strategy for improving workforce productivity and performance, both the value of EHM and the performance of the organization should be improved, dramatically in many cases.


  Mike wrote @ April 14th, 2008 at 3:14 pm

Nice analysis Scott - as always, with good insight.

  navtej kohli wrote @ April 16th, 2008 at 3:50 am

Scott, what I feel is that Employee health management is very important for improving employee health and productivity. But many companies are not realizing the importance of it and fear to adopt it due to increase in costs.

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