Slides - Northwest Center for Public Health Practice

Return on Investment
Wendy Baesler, MAcc
Evidence-Based Public Health

From the CDC…
• How do you really know you’re making the most
of your limited resources?
• How do you decide between two promising
program options when you can only afford one?
• How do you demonstrate to decision-makers
that the benefits of your program are worth the
cost?

From the CDC…
The answer: Economic evaluation—a powerful
tool that can help with all these situations.

Motivation for Economic Analysis
INPUTS
Resources used
such as money,
time, labor,
supplies
OUTPUTS
Change in
health
outcomes

Value of Economic Evaluation
“More important than deciding whether dollar benefits
exceed dollar costs is the questioning approach inherent in
these frameworks. One cannot assume that a program is
efficacious without evidence, even though prestigious
experts may ‘feel’ that it is. One cannot begin with the
notion that resources are plentiful so that one need make
only some emotional plea in order to be able to mount a
major health program. More attention to defining goals and
to evaluating efficacy should be combined with benefit-cost
analysis if we are to improve the health of the nation.”
—Lester Lave

Cost of Economic Evaluation
“We should keep in mind that it takes many resources
(time, skill, and money) to do CBA well, especially where
the projects are large, complex, and have unique features.
The costs of conducting CBA can be very large. For
example, Thomas Hopkins reported in 1992 that a CBA of
reducing lead in gasoline cost the Environmental Protection
Agency (EPA) roughly $1 million.”
—Boardman, Greenberg, Vining & Weimer

Economic Evaluation Concerns
“Does CBA debase the terms of public discourse? A number of
objections have been raised to the effort made in CBA to value all
policy impacts in terms of dollars: Pricing goods not normally traded in
markets—for example life itself—decreases their perceived value by
implying they can be compared to goods that are traded in markets…”
“Does CBA undermine democracy? Some critics of CBA charge that
it undermines democracy by imposing a single goal, efficiency, in the
assessment of public policies. The general public, politicians, and
even economists, however, very often consider goals reflecting other
values to be relevant.”
—Boardman, Greenberg, Vining & Weimer

Various Measures of Economic Evaluation
Cost effectiveness analysis
Cost utility analysis
Cost benefit analysis
Cost per unit of health
outcome
Cost per life saved or per
year of life saved
Benefits : Costs
Return on investment
Social return on investment
Percentage showing benefits
as percent of costs
ROI from a societal
perspective

Cost Benefit Analysis
• A form of economic evaluation that standardizes costs
and benefits into dollars and compares them
• Ratio Benefits : Costs
• Fraction Benefits
Costs
www.jala.com/homecba.php
www.americantrails.org/resources/health/trailinvest.html

Return on Investment
ROI =
Benefits of investment - Amount invested
Amount invested
Decision rule: If ROI is greater than 0%, the program’s
benefits exceed its costs.

Traditional ROI Calculation
Purchase a share of stock for
$82 and sell it for $91. What
is the ROI?
(91 - 82) 8
= = 11%
82 82

ROI Expressed as a Ratio
Benefits : Costs
Each benefits and costs are
divided by costs so that the ratio is
some number : 1
Abstract of Trust for America's Health in July 2008
www.healthyamericans.org/reports/prevention08

Sample Calculations
Program ABC
Benefits: $6,000,000
Costs: $5,260,000
Compute cost benefit ratio: 1.14 : 1
Compute ROI as percentage: 14%
Compute ROI as a ratio: 1.14 : 1
Program XYZ
Benefits: $400,000
Costs: $432,000
Compute cost benefit ratio: 0.93 : 1
Compute ROI as percentage: - 7%
Compute ROI as a ratio: 0.93 : 1

You try a calculation…
Benefits = $52,000 and Costs = $48,000
What is the return on investment expressed as a percent?
A. $4,000
B. 83%
C. 8.3%
D. 7.7%

Steps to Determining Costs and Benefits
1. Specify the set of alternative projects
2. Decide whose benefits and costs count
3. Catalog the impacts and select measurements
4. Predict the impacts quantitatively over project life
5. Monetize (attach dollar values to) all impacts
6. Discount benefits and costs to obtain present values
7. Perform the net present value of each alternative
8. Perform sensitivity analysis
9. Make a recommendation

Perspective of an Economic Analysis
Viewpoint from which the
economic evaluation is
conducted. Costs to whom?
Benefits to whom?
Perspectives for ROI or CBA
1. Patient
2. Provider
3. Payer
4. Health care system
5. Society (this is social ROI)

Patient Perspective
Costs born by the patient
and benefits accruing to
the patient are relevant.
Example: Should I get a flu
shot this year?

Provider Perspective
People or institutions
providing health-related
services (physicians,
hospitals, nursing homes,
public health clinics, and local
and state health departments).
Provider costs and provider
benefits are relevant.
Example: Should we set up
and operate a childhood
immunization reminder
system?

Payer Perspective
Person or entity ultimately responsible for the financial
costs (households, businesses, private insurers, Medicare
or Medicaid, or government). Costs to the payer and
benefits to the payer are relevant.
Example: Should General Motors adopt a health promotion
program, LifeSteps, designed to improve employees’ and
dependents' health status?

Health Care System Perspective
Costs for the entire health care system are relevant
as are benefits to the entire health care system.
Example: Considering a program to treat STDs.

Society Perspective (SROI)
Broadest perspective. Consider all costs regardless of who
pays them and all benefits regardless of who accrues them.
Example: ROI of Mobile Healthcare by Oriol et.al. 2009

Social Return on Investment
• A return on investment that considers the benefits to the
entire society as well as the costs to the entire society.
• Differs from return on investment only in perspective.

Steps to Determining Costs and Benefits
1. Specify the set of alternative projects
2. Decide whose benefits and costs count
3. Catalog the impacts and select measurements
4. Predict the impacts quantitatively over project life
5. Monetize (attach dollar values to) all impacts
6. Discount benefits and costs to obtain present values
7. Perform the net present value of each alternative
8. Perform sensitivity analysis
9. Make a recommendation

Identifying Costs & Benefits
• Goal: express costs and
benefits in monetary
terms.
• Start with a list of costs
and benefits in words.
• Do your best to determine
whether those costs and
benefits can be measured.
You will have to estimate
more than you may be
comfortable with.

Types of Benefits
Direct benefits
Indirect benefits
Intangible benefits
Medical dollars directly
saved
Potential increases in
earnings or productivity or
medical dollars indirectly
saved, reduced disability,
increased life expectancy,
etc.
Psychological benefits of
health, reduced pain and
suffering, peace of mind, etc.

Measuring Direct Benefits
• Direct benefits are medical dollars saved.
• Tricky because “…you’re measuring something that
doesn’t happen.” (Kimberly Redding, M.D.)I*
• One option: Use estimates of what it would have cost.
Example: the mobile healthcare provides a visit that had
a 80% chance of becoming an emergency room visit that
costs on average $923.
• Another option: Use research estimates of cost of that
illness either annually or over a lifetime.
*Director of Health Promotion and Disease Prevention,
Georgia Department of Community Health, Division of Public Health

Measuring Indirect Benefits: Human Capital
Approach
• Value of life saved or extended.
– QALY = Quality-Adjusted Life Year
– DALY = Disability-Adjusted Life Year
• Value of a life year derived from value of life. The value
of a year of life ranges from $70,000 to $175,000
depending on the source of the estimation.
• Value of life ranges from $300,000 to $2,000,000
depending upon the source of the estimate.

Measuring Indirect Benefits: Human Capital
Approach
Australian study estimate
• Value of life = Loss of workforce productivity + Loss of
household productivity + Loss of quality of life
• $1,400,000 = $540,000. $500,000 + $319,000.
FAA (1980 citation)
• Value of life = $300,000 based on recent court awards
Nuclear Regulatory Commission
• Cost of premature death = $1,000,000

Measuring Indirect Benefits: Survey Methods
• Revealed preference: A survey figures out the value of
something by asking questions around the subject.
Example: Salary expected in post office with 0 risk of
death vs. salary expected in post office with 2% chance
of death.
• Stated preference: Ask directly what a person would be
willing to pay for the benefit.
Example: How much would you pay for security service
that reduces risk of terrorist attack on an airplane that
you are flying on?
• A person will pay from $250,000 to $500,000 for a
decrease in the probability of death.

Types of Costs
Direct costs
Value of people, equipment,
facilities, and supplies used
in a particular program
including appropriately
allocated shared costs
Indirect costs
Costs not directly related to
the program (time taken off
work to receive medical
treatment, childcare, travel
costs, productivity loss due
to side effects of treatments)

Types of Costs
Intangible costs
Non-cash costs
Opportunity costs
Otherwise preferred private
behavior cost
Emotional anxiety, fear, pain,
suffering, etc. (e.g., pain
from immunization)
Costs of volunteers and
donated resources
Benefit of the foregone
alternative
If a public health message
convinces you to bike with a
helmet, but you prefer to ride
without, that loss is a cost

Measuring Direct Costs
• Cost of all personnel, equipment, facilities, and supplies
used. Shared costs should be appropriately allocated.
• Ideally include only the avoidable costs—the costs that
would go away if the program went away. Example:
administrative costs allocated to the program are usually
not avoidable.

Measuring Indirect Costs
• Can only be estimated. No standard practices exist.
• Opportunity cost is the value that could be received
from the foregone alternative.
Example: Personnel for a mobile health van.

Alternative Is ROI in Words
• Many costs not tracked
• Many benefits difficult to
determine
Photo: John Johnston

ROI Analysis of Bikes on Busses (BOB)
Costs
• Capital cost of purchasing racks
• Maintenance cost of
repairing/replacing racks
• Administrative cost of day-to-day
operations
• Marketing costs of program
• Insurance claims and incidents
• Permitting process and training
• Funding of bicycle facilities to
access transit
• Provision of bicycle parting
• Bicycles abandoned on racks
• Route delay and increased dwell
time
• Impact of rack capacity limitations
Benefits
• BOB ridership/boardings
• Expansion of transit service area
• Attraction of new transit riders
• More frequent use of transit
• Bicycle locker rental fees
• Improved bicycle safety
• Reduction in traffic congestion
• Improved air quality
• Promotion of healthy lifestyle
• Improved transit agency image
• Increased mobility

Let’s consider a public health program to increase
hand washing…
Lets adopt a society perspective
Everybody type a cost of such a program in the chat box
Everybody type a benefit of such a program in the chat box

Steps to Determining Costs and Benefits
1. Specify the set of alternative projects
2. Decide whose benefits and costs count
3. Catalog the impacts and select measurements
4. Predict the impacts quantitatively over project life
5. Monetize (attach dollar values to) all impacts
6. Discount benefits and costs to obtain present values
7. Perform the net present value of each alternative
8. Perform sensitivity analysis
9. Make a recommendation

Computing Present Values
If the costs or benefits are far in the future, state those
costs or benefits in today’s dollars.
Present value = Future value / (1+i) n
n = number of years in future
i = annual interest rate or discount rate = 3%
Can use Present Value Tables
Can use Excel =PV(rate,nper,pmt,[fv],[type])
Sum of the present value of all the future net cash flows is
called the Net Present Value. If NPV is greater than 0, the
project is financially worthwhile.

Partial Present Value Table
Present value of $1 to be received at the end of n periods (PV)
Period 1.00% 2.00% 3.00% 4.00%
1.00 0.9901 0.9804 0.9709 0.9615
2.00 0.9803 0.9612 0.9426 0.9246
3.00 0.9706 0.9423 0.9151 0.8890
4.00 0.9610 0.9238 0.8885 0.8548
5.00 0.9515 0.9057 0.8626 0.8219

Time Period Adjustments
Year 1 Year 2 Year 3 Year 4 Year 5 Total
Benefits 5,000 5,000 70,000 100,000 160,000 340,000
Costs 100,000 30,000 35,000 40,000 45,000 250,000
ROI 36.0%
Benefit -
Cost
PV net
benefits
PV
Costs
-95,000 -25,000 35,000 60,000 115,000 90,000
-92,245 -23,575 32,030 53,280 99,245 68,735
97,100 28,290 32,025 35,520 38,835 231,770
ROI 29.8%

Steps to Determining Costs and Benefits
1. Specify the set of alternative projects
2. Decide whose benefits and costs count
3. Catalog the impacts and select measurements
4. Predict the impacts quantitatively over project life
5. Monetize (attach dollar values to) all impacts
6. Discount benefits and costs to obtain present values
7. Perform the net present value of each alternative
8. Perform sensitivity analysis
9. Make a recommendation

ROI Studies in Public Health
• Trust for America’s Health report included public health
programs that produced very large returns on investment
• Community Preventative Services Website
• “An Ounce of Prevention” by the CDC in 1999
• Minnesota Institute of Public Health blog
• Worksite health promotion
• Value-based Insurance Design

Summary
• Cost benefit analysis
• Return on investment
• Social return on investment
• ROI has limitations
• Designing a program and building in measurement of
costs and benefits at the onset is important