September 30, 2013 – WorkCompWire
By David A. Donn, President, David Donn Consulting, Inc.
How often do you see ROI (Return on Investment) being used by managed care service providers to promote the financial benefits of their product? “ROI 10 to1” says one company. “Our ROI is one of the highest in the industry,” says another. But is having a higher ROI a good thing, and should you rely on it when evaluating a PPO, case management or medical bill review company? While ROI is pertinent for gauging management effectiveness in a capital intensive business, ROI is a misleading indicator in the managed care service industry and I’ll explain the reasons why.
Medical bill review companies, PPO networks and case management companies have long used ROI to sell their products. ROI means “Return on Investment.” It’s a common financial ratio used to gauge management effectiveness. Correctly used, it relates net income to a measure of investments entrusted to management – specifically, the relationship of total assets to net income generated by these assets.
The correct ratio would read:
True ROI takes into consideration assets, other investment income, debt and accounting considerations where there has actually been an “I” or investment made, to which the investors are looking for their “R” or return. Not the case in workers compensation managed care though, and therein lies the risk of relying on it.
When you purchase the services of a medical bill review, PPO or case management company, you pay a fee for those services. That’s it (some will say “what do you mean that’s it, isn’t that enough?). You’re not making an investment in your service provider in the true sense of the word, and you’re certainly not being paid interest or benefiting from depreciation. You pay a fee and you get a service that hopefully saves you money. So to start off with, there is no “I.” There is only an “F,” for fee. So I guess in this day and age of correctness, we should change the acronym to “ROF.” That certainly would more accurately reflect the ratio, but does it improve the ratio’s appropriateness as a value measurement? NO, it doesn’t.
Let me explain by way of example:
Provides medical bill review services and claims it saved a client $250,000 off their medical bill charges and invoiced the client $25,000 in fees. The ROI (really ROF to be correct, but you get the point) would be 10 to 1, right? ($250,000 in savings; $25,000 in fees; divide the savings by the fee and you get 10 to 1). The net savings to the client – savings less fees is $225,000.
Provides medical bill review services and claims it saved their client $400,000 with a similar program (more about what accounts for these savings differentials in my next position paper entitled “Bill Review Ain’t Bill Review, No Matter What They Say”) and invoiced the client $50,000 ($25,000 more than Company A). The ROI therefore is 8 to 1 – lower than Company A’s ROI of 10 to 1.
But look at the difference in net savings, which is what all buyers should look for with any managed care product. Company B’s net savings is $350,000 ($400,000 less the fee of $50,000), $125,000 MORE than Company A’s, but with a lower ROI. Any buyer of managed care services would be more than happy to pay an extra $25,000 in fees to have an extra $125,000 in the bank – it’s a no brainer. But if you were focused on ROI, as some managed care companies would like you to be, you would have lost out big.
I have long felt that ROI is a false indicator in the managed care business and should not be relied on as a measurement tool for effectiveness. If used, it should only be when comparing two similar service providers, offering the SAME savings but a different fee. But then, you wouldn’t need a ratio to help you choose the right company, just look at the net savings. Throw ROI out, and look at net savings. After all, isn’t that the bottom line?