Using the Return on Investment Template

THE BUSINESS CASE FOR QUALITY

IN MEDICAID MANAGED CARE

Using the Return on Investment Template

Developed in collaboration with:

The Center for Health Care Strategies

May 2007

Kristin Reiter, PhD1

Kerry Kilpatrick, PhD1

Sandra Greene, DrPH2,1

Sheila Leatherman, MSW1

1

Department of Health Policy and Administration, University of North Carolina at Chapel

Hill

2

Cecil G. Sheps Center for Health Services Research, Chapel Hill, NC

Acknowledgements

The development of the return on investment template and the related supplemental

instructional manual were supported by a grant from The Commonwealth Fund.

The authors gratefully acknowledge the valuable input of Stephen Somers, Melanie

Bella and Allison Hamblin at the Center for Health Care Strategies, and the excellent

research assistance of Emily Keyes.

2

TABLE OF CONTENTS

Introduction

4

Why Care About the Business Case?

4

What is a Business Case?

4

The Components of the Payer Business Case Analysis

5

Things to Consider Before Undertaking a Business Case Analysis

5

Instructions for Using the Return on Investment Template

7

Proposed Use

7

Design of the ROI Template

7

The Data Entry Spreadsheets

7

Tab 2. Initial Investment Cost Data

7

Tab 3. Operating Cost Data

9

Tab 4. Paid Claims Data ¨C Intervention

9

Tab 5. Paid Claims Data ¨C Control

10

The Output Spreadsheets

10

Tab 6. Paid Claims Data ¨C Incremental

10

Tab 7. Return on Investment Analysis

11

Tab 8. Incremental ROI Analysis

12

References

13

Appendix A ¨C Sample Business Case Analysis

14

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Using the Return on Investment Template

The purpose of this instructional manual is to introduce the rationale for establishing a business

case for implementing quality enhancing interventions (QEIs) in health care, and to present step

by step instructions for using the return on investment template to collect and display the

required data. The template is intended to provide a general starting point for retrospectively

analyzing the business case; however, no two settings or QEIs are precisely the same.

Therefore, users need to be mindful that some customization of methods may be required in

any application.

INTRODUCTION

Why Care About the Business Case?

1. Absent a convincing business case it is unlikely that quality interventions will be

sustainable over the long run. While commendable, good intentions can only go so far

toward convincing providers (and payers) to adopt QEIs.

2. In cases where an organization has determined that the evidence base warrants the

adoption of a QEI, having information about the business case provides a more

complete picture of the overall consequences of the intervention for the organization.

3. If the ultimate goal is to attempt to align financial incentives to pay for quality,

organizations investing in QEIs need to explicitly measure the costs and savings

attributable to the interventions.

To recognize the importance of having a strong business case, one has only to look at the fact

that deficiencies in the quality of health care remain prevalent despite an increasing body of

evidence to guide the implementation of proven quality interventions [1-3]. Policymakers,

payers, and employers continue to express their frustration that QEIs of demonstrated

effectiveness are not being implemented on a broad basis. Even after decades of careful

evidence-based practice research, one of the principal reasons that hospitals, health care

delivery systems, and individual providers in the United States give for not implementing

promising health care QEIs is that no ¡°business case¡± for quality can be made. Recent case

studies confirmed that, in the absence of a convincing business case, quality interventions have

a low probability of widespread adoption and a lower probability of being sustained over time [4].

What is a Business Case?

The general notions encompassed in the development of a business case for quality are mostly

drawn from non-health care industry. For health care, the recent interest in the business case

was generated by an article in Health Affairs by Leatherman, et al.[4]. There the authors define

the business case (see box below) and provide an analysis of a series of case studies, which

sought to confirm the existence of a business case in a variety of commercial settings.

A business case for a health care improvement intervention exists if the entity that invests in the

intervention realizes a financial return on its investment in a reasonable time frame, using a

reasonable rate of discounting. This may be realized in ¡°bankable dollars¡± (profit), a reduction in

losses for a given program or population, or avoided costs. In addition, a business case may exist if

the investing entity believes that a positive indirect effect on organizational function and sustainability

will accrue within a reasonable time frame.

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As the definition suggests, a business case may exist even in the absence of a direct financial

return on investment for the organization which implements the intervention. The templates,

however, focus on modeling the financial consequences of a QEI. Thus, users need to consider

other positive effects on the organization that are not quantified in the templates before

concluding that there is no business case for an intervention.

Examples of non-financial benefits include, but are not limited to:

?

?

?

?

?

?

Improved market recognition for quality

Enhanced market share

Improved employee satisfaction/retention

Improved provider satisfaction

Enhanced inspection and/or accreditation status

Fulfillment of mandated requirements, e.g., conditions of participation with state

Medicaid program

Note that the definition of the business case is from the perspective of the ¡°entity that invests in

the intervention.¡± If that entity is a primary care practice, group practice, or health clinic, the

business case (return on investment) is calculated from that perspective. If cost savings or

other benefits accrue to a party (including the patient) other than the one making the

investment, the benefits are not included as part of the business case. In this way, business

case analysis differs substantially from other types of economic analysis (e.g., cost-benefit,

cost-effectiveness, cost-utility) which often measure costs and benefits from a societal

perspective.[5] The perspective of business case analysis is purposely narrow since its primary

goal is to determine the sustainability of QEIs from the investing organization¡¯s perspective. For

QEIs that are cost-effective, business case analysis can help identify financing misalignments

that may serve as barriers to adoption.

The Components of the Payer Business Case Analysis

Basically, to compute a financial business case for quality (measure the return on investment)

for your intervention, you will need estimates of three things:

1. The costs incurred to develop the intervention.

2. The continuing costs of operating the intervention over time.

3. The effect on paid claims, revenues, and other quantifiable financial benefits or costs

that accrue to the organization that implemented the intervention.

Surprisingly, a review of the literature [6] found that organizations frequently were able to report

on the savings or other benefits of a quality intervention, but did not report (and perhaps did not

know) what the intervention cost to develop and to operate over time. The return on investment

template has been developed to assist you in collecting and managing these data.

Things to Consider Before Undertaking a Business Case Analysis

1. The evidence that the QEI improves quality. If you implemented a QEI that clearly did

not achieve your quality goals and would not likely be used again by your organization,

then there is little sense in engaging in an analysis of the return on investment for that

particular QEI.

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