Measuring Return on Investment
Introduction
Healthcare organizations face mounting financial and clinical pressures. On the financial front, dropping revenues are forcing providers to reduce operating costs. On the clinical front, growing concern voiced by the public, government, and employer groups regarding clinician and patient safety are forcing healthcare providers to find new ways to improve clinical care and outcomes.
Clinical transformation — the integration of work process improvements with enabling technology — promises to help providers meet these goals. But clinical transformation costs significant sums and puts tremendous demands on an already stretched set of provider resources, including human resources and hardware and software. Healthcare executives understandably want to know what their return on investment (ROI) will be before they commit to a project.
In this article, we set out a process and guidelines for answering this question. But first a caveat: ROI is typically regarded as a financial measurement, a way of calculating the financial benefits of a financial investment. Here, however, healthcare providers must expand the definition of "ROI" to include ways of measuring progress towards other, equally important, goals such as greater patient and clinician safety and satisfaction and improved patient outcomes.
What Does ROI Measure?
When we measure the ROI for a hospital's clinical transformation, we calculate "the return" in terms of service (patient satisfaction, turnaround, and wait times), quality (patient outcomes and reduction in errors), and financial benefits (cost savings and revenue-generation) — three key measures of an institution's health.
While financial data are relatively straightforward to measure, quality and satisfaction are sometimes seen as too "soft" to measure. Nevertheless, indicators of patient satisfaction (wait times, throughput, and elopements) and indicators of quality (ER diversion rates and medication errors) can all be quantified and graphed. In fact, in some cases, hospitals already have these data, but have never tracked or translated them into a form that supports decision-making.
Within each of these three broad categories — service, quality, and financial — we measure three classes of related benefits which each depend on the technologies of clinical transformation to varying degrees. For example, benefits that are:
- Completely dependent on technology: These benefits cannot be realized without
the use of technology. For example, salaries for manual data entry, or medical
record chart movement, or scheduling staff cannot be eliminated — and
these costs saved — without the appropriate technology.
- Enabled by technology: These benefits occur when certain work processes
are enabled by technology. For example, an automated pharmacy system alerts
physicians when they are about to prescribe a drug with a preferred (and lower
cost) equivalent. This system yields financial and patient outcome benefits
because the prescribing process itself (enabled by technology) consistently
alerts physicians to preferred and lower cost drug alternatives.
- Sustained by the technology: These benefits occur when improved work processes are sustained by the technologies of transformation. The use of multiple types of sutures in the OR is a good example. By changing OR work processes to limit the number of different sutures used, a hospital can save money on inventory, ordering, and supply chain costs. But the only way to track and sustain this new policy is to implement automated preference cards. The system "polices" the new process and ensures that the benefits — reduced costs, consistently better sutures — are consistently realized.
Thus, for example, we might compare the potential quality benefits of implementing just technology with the quality benefits of implementing process improvements sustained by technology. The same holds true with financial and service benefits.
In our experience with at least 15 large organizational clinical transformations, the greatest benefits come from implementing technologies that sustain improved, more efficient work processes. The fewest benefits come from simply implementing clinical technology and automating current processes. From a strict ROI perspective, technology-only implementations cannot pay for themselves, while implementations in which technology sustains improved processes frequently pay for themselves in five to seven years.
This experience reinforces the basic premise of clinical transformation, that the greatest ROI is achieved by integrating work process improvements and organizational change with enabling technology.
Making the Business Case for Clinical Transformation
Before healthcare executives commit to clinical transformation, they often want to know what their organizations can expect in return. The IPD (improvement portfolio development) process helps answer this question. The IPD is like generating a mini-ROI before work has begun. The IPD helps the hospital quantify expectations.
The IPD is, broadly speaking, a three-step process:
Step 1: Confirm Business Issues and Assess Current State
The first step is to find out where an organization is relative to where it wants to be. In the earliest stages of clinical transformation, an organization has generally outlined a broad vision for change and targeted key areas for improvement, e.g., care management and patient care services. The first step in the IPD is to analyze the business and technology issues associated with these objectives. What external factors (for example, the economy) and what internal factors (culture, existing technologies, and staffing) will the organization confront as it attempts realize its vision?
Step 2: Benchmarking
Benchmarking measures the size of an organization's opportunity in service, quality, and financial terms. Based on leading and emerging industry practices, benchmarks provide an objective estimate of those improvements that offer the organization the greatest potential value, as illustrated in Figure 1. These objective benchmarks must then be validated against the organization's internal criteria and realities.
Step 3: High-Level Opportunities for Change
The assessment and benchmarking from steps one and two are used to define and quantify probable service, quality, and financial benefits for each targeted area. The process moves one step further with high-level descriptions of methodologies for achieving these benefits. These descriptions outline project management approaches, resource requirements, monitoring and measuring systems, timetables and sequencing and estimated capital and operating costs for moving from the hospital's current state to its desired future state.
In essence, an IPD is a business case for implementing clinical transformation
at a particular hospital or healthcare system. Since clinical transformation
is most productively implemented in stages, the IPD helps clients identify and
capitalize on short-term "quick results," incremental improvements, and long-term
and larger scale transformation. In addition, prospective benefits are ranked
by size with technology-only changes offering the fewest benefits and technology-sustained
process improvements offering the greatest benefits.
| The Telltale Signs of An Unrealistic ROI |
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Setting Realistic and Achievable Goals
What is a realistic and achievable ROI? The IPD establishes a pro forma ROI target by measuring the difference between an organization's current state and the industry's leading practices. But closing this difference completely may or may not be an achievable goal for an organization. Much depends on the organization's particular internal and external circumstances.
For example, the IPD may show that a hospital has 50 percent more excess days than leading practices would suggest are normal and attainable. With the proper systems and processes in place, it could close that gap. One could say that the hospital has a valuable opportunity to cut costs by reducing excess days.
Figure 1: Benchmarks quantify the opportunity.
But is a 50 percent improvement in excess days an achievable and realistic goal for this hospital? For example, are there other post-acute care facilities nearby to which patients can be sent?
If the answers are no, a 50 percent improvement is not a realistic goal for this institution. An experienced expert might assess the hospital's internal and external circumstances and reduce the pro forma goal by as much as half. Indeed, since all hospitals are saddled with some limiting circumstances, an "achievability factor" of 40-50 percent should be built into almost all target ROIs.
The lesson? Setting realistic ROI goals and reaching them depends on having key success factors in place. Among these are:
- Strong leadership and executive sponsors for clinical tranformation
- Outside expertise with broad industry experience
- A staff culture conducive to change
Staff culture is a particularly important, but often overlooked, success factor. For example, instituting an automated medication ordering process to improve the accuracy and efficiency sounds like an easy and straightforward way to improve ROI. But implementing this system will require already busy physicians and nurses to do even more of the work of order entry. If they are not willing to change or take on added responsibilities, this improved ROI may prove elusive.
Since changes in work processes are integral to clinical transformation, the current state assessment measures physician and staff's willingness to change the way they work. Their attitude is one of the critical internal factors the organization will confront as it implements desired changes. Figure 2 shows the results of a survey that measured CEOs perceptions of their physicians' willingness to change.
Ongoing Measurement and Accountability
What gets measured gets implemented! One of the keys to achieving ROI targets is developing a "scorecard" that defines expectations and accountabilities for executives and staff and monitors performance on a monthly basis. These goals must be built into performance reviews and financial incentives and supported by appropriate department budgets. When goals are missed, there must be a plan in place for getting staff back on track.
It is just common sense: If you want a million-dollar improvement in supply chain or drug costs, you must give the responsible executives the performance goals, financial incentives, and budgets to get the job done.
Figure 2: Are Your Physicians Willing to Change? Results of CEO Survey
Managing Your Vendor's ROI
Vendors' tales of the spectacular ROIs achievable with their technologies have beguiled more than one hospital executive. While vendors understand their technology well, they often fail to grasp the realities of the healthcare environment or a provider's varied goals for clinical transformation. Their "economic value calculations" are not reliable for several reasons.
- They ignore necessary process changes. As we pointed out earlier, the greatest
ROIs are achieved when technology sustains process improvements. Vendors'
estimates, however, typically do not contemplate this all-important element,
and their training programs apply strictly to the technology.
- They ignore basic realities. When a vendor claims that their system will save X number of nursing hours, and therefore X amount of dollars, they ignore basic realities of the healthcare environment. When nurses become more efficient at one task, e.g., documentation, they rightly redirect the "saved" time to other nursing tasks, such as caring for patients. Quality of care may improve, but the dollars vendors claim to be able to save never appear on the bottom line.
Communicating ROI to the Board
Board members are not experts in clinical transformation, yet they are the ones who must make the decision to commit many millions of dollars to clinical transformation projects. The arguments for clinical transformation must therefore be clear, compelling, and where possible, supported with graphics.
Board members must understand the costs, risks, and benefits of clinical transformation, and how the benefits justify the costs. The financial benefits are the easiest to communicate, but the board must also understand the vital importance to the organization of improved service and quality.
Perhaps most importantly, board members must be educated about the realities of implementing clinical transformation. Beyond the high financial costs, implementations take a lot of work and perseverance from the board and staff. Clinicians, in particular, will have to be persuaded to fundamentally change the way they practice. They will be required to take on new responsibilities and undergo extensive training on the new system. Board members must be educated to "stay the course" if physicians and nurses balk at adopting the new system, and they must hold senior leadership accountable for performance.
Summary
Measuring ROI is vital to the success of clinical transformation. It quantifies the financial, service, and quality benefits of clinical transformation and, through objective benchmarks and realistic goals, makes the business case for committing financial and human resources to a project. Once a project is underway, ROI metrics become the basis for monitoring progress and driving staff performance through performance reviews and financial incentives.
In short, measuring ROI is not only a way to calculate prospective and realized benefits of clinical transformation, it is also a powerful tool for making it work.
