How to Measure Return on Investment - Semantic Scholar

How to Measure Return on Investment

Michael Imhoff

Dr. med. Michael Imhoff Chirurgische Klinik St?dtische Kliniken Dortmund Beurhausstrasse 40 D-44137 Dortmund Germany

Tel: +49-231-50-20021 Fax: +49-231-50-20081 email: mike@imhoff.de

M. Imhoff: How to Measure Return on Investment

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Abstract

As a result of the increasing pressure on health care expenditures calculations of the return on investment (ROI) have been attempted in assessing the utility of medical equipment purchases. The measurement of ROI requires an in-depth analysis of equipment cost, cost structure, and medical processes. ROI analysis in health care is more complicated and error-prone than in most other industries. Results may dramatically vary between different countries even for the same investment. This article will outline a practical approach to ROI analysis in health care.

Keywords

Amortization - medical equipment - medical information technology - reimbursement - cost-effectiveness analysis

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Introduction

Under the increasing pressure on health care expenditure hospital administrators and health care professionals have been forced to focus their decision-making more and more on cost and cost effectiveness of care. Just one or two decades ago most investments into medical equipment, facilities, or staff were seen from a medical perspective, such as providing for better treatment, advanced medicine, or satisfying customer, i.e., patient, requirements. Today investments must prove their pay back also in monetary terms. It has become more important not only to measure but also to forecast the amortization of investments into health care [1, 2, 3, 4, 5].

Therefore, it comes to no surprise that since 1970 about 400 articles with reference to return on investment (ROI) are listed in the MEDLINE database [6]. Despite the sheer number of articles the clinician remains dissatisfied, as most of these articles deal with pharmaceutical development and veterinary medicine (food production). Only very few articles provide information about the theory and practice of ROI analysis in the clinical field. Therefore, this article tries to cover at least some clinically important aspects of this topic.

Webster's dictionary defines return on investment in the following terms: "return is the profit derived from investment. Likewise return on investment is the profit that the investment yields."[7]

The terms and definitions of "return on investment" and "cost effectiveness" have their origins in the economic literature rather than in medical science [8]. Therefore, most of our knowledge and methods for measuring ROI do come from non-medical applications. If we compare the health care industry with other productive and service industries there are many aspects that may significantly affect ROI analysis. For instance, in other industries

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? increasing overall revenue is one important aspect of ROI,

? hard data about the production process, costs, and retail prices are available,

? easily quantifiable products are produced, and

? the rules of a free market can be applied.

In health care the situation is more complicated:

? There are many external restraints and most countries do not have a free health care market.

? There are certain quality requirements, for instance, to avoid litigation for malpractice, or to satisfy patients' requirements. But this is in some way comparable to other industries like aviation [3].

? The consumer, i.e. the patient, does not always have to pay directly for the service he makes use of. Therefore, the medical customer may have different appreciation of health care services than of other, non-medical products.

? The investor may not always be the party receiving the ROI. For instance, in many regions and countries capital investments into hospitals may be supported by state or federal funds, while the operating costs of the hospital are covered by the hospital's budget. In this scenario the investor, e.g., the state, may not have a strong incentive to invest more to reduce the operating cost of the hospital, as this may only benefit the hospital's but not the state budget.

? Health care organizations, e.g., hospitals or independent delivery networks, may not be allowed to keep their profits, as is the case in several European countries. Therefore, they do not have a strong incentive to make investments that may in the long run increase their profitability.

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Another very important aspect in the analysis of ROI are the different reimbursement methods that generate the hospital's revenue [9]. Even within one health care organization, but always across the different health care systems entirely different reimbursement methods may be encountered, as there are:

? Fee for service,

? case base and capitation,

? disease related groups (DRG),

? per diem,

? and combinations thereof.

It is obvious that these different reimbursement methods will lead to an entirely different financial bottom-line for the same investment and the same change in the medical process. An investment that may yield a significant ROI in one health care environment may result in a dramatic loss of money in another.

The scope of ROI in health care

In other industries the scope of ROI most often is very clear. It is typically only analysed from the perspective of the investor, which in most cases is also the company benefiting from this investment. Normally this perspective is the only applicable one.

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