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The Return on Investment Calculator: A New Tool for States

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This issue focuses on pursuing value in health care, both in terms of improving quality and controlling costs; that is, "getting more bang for the buck." We describe new tools for measuring returns on investments, initiatives for managing high-cost and chronic care patients, and federally designated collaboratives that are implementing value-driven initiatives.

In light of the current economic slowdown, states are making efforts to improve health care outcomes while controlling costs. Many states share a common challenge: to understand the costs and payoffs of quality improvement interventions. To meet this need, the Center for Health Care Strategies (CHCS) developed the Return on Investment (ROI) Forecasting Calculator for Quality Initiatives, with support from the Robert Wood Johnson Foundation. Additional support from The Commonwealth Fund enabled eight states to participate in a purchasing institute in which they tested the calculator, suggested improvements, and used it to develop their own quality improvement initiatives.

The ROI Calculator was publicly released in April 2008. It is designed to help Medicaid agencies, health plans, and other stakeholders estimate the return on investment from initiatives intended to more effectively manage the care of high-risk, high-cost beneficiaries.[1] The user-friendly, Web-based tool can estimate the financial implications of proposed interventions. The tool helps make a financial case when requesting funding or support from state budget and legislative officials—showing that investing in the short term may achieve savings, potentially within two or three years. The calculator is free for states and others to use, available at

According to Allison Hamblin, program officer at CHCS, "The ROI Calculator allows Medicaid policymakers to speak the 'ROI language.' It helps foster a dialogue among administrators, legislators, health plans, and chronic care management vendors about realistic costs and expectations of quality and value-based interventions."

Users of the ROI Calculator input information about the target population and expected participation rate, baseline costs, start-up period and time frame for analysis (up to three years), intervention costs and cost trends, and expected changes in utilization of health services (e.g., inpatient care, emergency department, outpatient care, lab, and pharmaceuticals) resulting from the intervention. To help users generate assumptions for expected changes in utilization, the ROI Calculator includes an "Evidence Base," which summarizes published studies documenting utilization changes from chronic care management interventions. The Calculator's Evidence Base currently includes studies on asthma, diabetes, heart failure, and high-risk pregnancies and provides information on intervention strategies, target population, outcomes, and quality of the study design.[2]

The tool calculates return on investment over the time period requested, incorporating sensitivity analyses to account for uncertainty in the assumptions. The tool is flexible, allowing users to input a goal—such as break-even or a specific ROI—and work backward to determine the parameters needed to reach that goal.

Figures 1 and 2 display ROI Calculator results for a hypothetical example of an asthma intervention applied to high-risk children. Assumptions of changes in emergency department utilization are based on research from the ROI evidence base. Using various other assumptions and cost estimates, the estimated ROI in the third year of implementation would be 1 to 1.77. That is, for every dollar invested, the program saves $1.77.[3]

Figure 1: Sample ROI Analysis
Target Population
Eligible Population Children
Total Membership in Eligible Population 150,000
Clinical Focus Asthma
Target Strata High Risk
Outreach Goal 60.00%
Ramp-up Period 12 months
Total Target Population Members 3,600
Total Intervention Group Members 2,160

Source: Center for Health Care Strategies

IMPORTED: www_commonwealthfund_org__usr_img_SIA_06_18_08fig2.gif

Source: Center for Health Care Strategies

Eight states piloted the ROI Calculator through the CHCS ROI Purchasing Institute. The Institute offered training, technical assistance, and early access to the Calculator to design and/or assess quality improvement initiatives. A recent webinar describing the ROI Calculator and some of these states' experiences can be found on the CHCS Web site. The participating states also gave feedback to the ROI planning team, helping to shape the final tool. Below we describe the experiences of two states, Arizona and Pennsylvania, that participated in the ROI Purchasing Institute.

Arizona Uses ROI Calculator for P4P Design
Arizona's Medicaid program, Arizona Health Care Cost Containment System or AHCCCS, used the ROI calculator to help design a statewide Medicaid pay-for-performance (P4P) system for its contracted managed care organizations (MCOs). Though each MCO currently has its own P4P program, AHCCCS officials reasoned that multiple P4Ps place burdens on physicians by requiring them to provide different types of data and focus on different performance measures for different health plans. "One coordinated statewide P4P would be less burdensome and would allow physicians to focus more intently on a uniform set of evidence-based performance measures," says Marc Leib, M.D., J.D., AHCCCS's chief medical officer.

Through an iterative process of modeling scenarios and estimating ROI, AHCCCS designed a P4P program that would offer financial rewards to physicians for providing optimal care to diabetic patients and complete immunizations for two-year-olds. Early in this process, the tool led AHCCCS to dismiss a plan to expand an asthma intervention, since the low ROI results indicated that prior asthma care improvements had already been achieved and further investments were not likely to result in adequate additional returns.

Planners chose to link financial rewards to processes over which physicians have control, rather than outcomes that depend on patient compliance and other factors. Under the plan, physicians serving Medicaid beneficiaries would receive a $25 bonus payment per diabetic patient if: they have at least 50 diabetic patients and at least 50 percent of these patients receive three recommended tests during a year (HgbA1c, lipid profile, and renal panel). Also, physicians would receive a $25 bonus payment per two-year-old patient if: they have at least 50 patients turning two in a year and at least 80 percent of them receive all recommended immunizations. With estimated development, implementation, and incentive payment costs of $4.6 million over three years, and estimated savings of $10.1 million over three years (using conservative assumptions of reduced utilization), the ROI Calculator estimated a 2.2 to 1 return on investment over three years. That is, for each dollar spent on the program, $2.20 would be saved in reduced utilization. More optimistic assumptions resulted in ROI estimates of up to 5 to 1.

The budget and ROI findings, both derived from the ROI Calculator, were presented in the agency's budget requests to the legislature. However, current budget shortfalls have put virtually all new investments on hold. "Unfortunately, even with positive ROI within three years, the legislature needs to consider this year's budget needs," says Leib. But AHCCCS will present updated ROI findings again next year and will be ready to implement the intervention when funds become available. Also, Medicaid officials are considering ways to encourage better coordination of P4P programs and measures across the contracted MCOs to achieve greater focus on shared improvement goals.

AHCCCS will continue using the ROI Calculator in other ways, such as assessing programmatic changes and other value-based initiatives. Also, they will encourage the MCOs to use the tool for their own P4P programs. "The ROI tool forces you to conduct analysis based on solid data," says Leib. "Frankly, we were sometimes surprised because what we thought we knew proved not to be the case."

Pennsylvania Uses ROI to Target Disease Management Populations
Pennsylvania's Medicaid agency, the Office of Medical Assistance Programs or OMAP, used the ROI Calculator to examine the impacts of its existing disease management program on specific populations and determine how to enhance future disease management efforts.

Medicaid officials knew from past analyses that its disease management program for diabetes and four other conditions managed by their Primary Care Case Management vendor had an overall return on investment of 1.8 to 1 in its first year. They used the Calculator to measure the ROI for diabetes patients with one particular comorbidity or different combinations of various comorbidities. Results indicated that disease management focused on care guidelines tailored to patients with multiple comorbidities had particularly high returns on investment. That is, the more comorbidities, the greater the opportunity for savings.[4]

Based on this information, the state plans to focus more intensive disease management on this group of beneficiaries, for example having face-to-face visits instead of telephone contacts. OMAP is currently negotiating these changes with its disease management vendors.

"The ROI Calculator allowed us to model a variety of options. And in modeling, there is always some guesswork. The ability to modify your assumptions is one of the best things about the tool," said Barry Buckingham, senior medical economist at OMAP.

Officials see the Calculator as a tool not only for prospective scenarios, but also to retrospectively determine whether programs achieved the expected returns. "We'll go back and plug in the numbers that really occur, and see just how far off we were," said Buckingham.

Next Steps for the ROI Calculator
As of late May, about 400 individuals had registered to use the ROI Calculator. Most represent the targeted users: Medicaid agencies (from more than half of states) and health plans serving Medicaid beneficiaries. CHCS is answering questions about the Calculator and providing guidance upon request, and is considering options for a more formal technical assistance program.

CHCS will continue to update and refresh the tool's evidence base. Also, it is seeking and receiving feedback from users, and will track how actual outcomes compare with predicted outcomes, "to help inform future editions and forecasting," says Hamblin. "The ROI Calculator is a living tool."

[1] For example, it could be used by state retirement health plans, state prison health programs, state legislative staff, consumer groups, and others considering value enhancements.
[2] A stand-alone ROI Evidence Base document available on includes studies on a fifth condition, depression.
[3] This is one example used by CHCS for demonstration purposes. It assumes reductions in emergency department visits of 69 percent in year one and 60 percent in year two, based on a randomized controlled trial. See Z. Harish, A. C. Bregante, C. Morgan et al., A Comprehensive Inner-City Asthma Program Reduces Hospital and Emergency Room Utilization, Annals of Allergy, Asthma, and Immunology, Feb. 2001 86(2):185–9.
[4] These calculations assumed ideal circumstances in terms of patient engagement and effectiveness of outreach.

For More Information on Arizona's Experience
See: Presentation on ROI Calculator, Marc Leib
Contact: Marc Leib, M.D., J.D., Chief Medical Officer, Arizona Health Care Cost Containment System, [email protected].

For More Information on Pennsylvania's Experience
Contact: Barry Buckingham, Senior Medical Economist, Office of Medical Assistance Programs, Pennsylvania Department of Public Welfare, (717) 265-8053, [email protected].

For More Information on the ROI Calculator
See: A. Hamblin, Using ROI Forecasting to Maximize the Value of Medicaid Investments, CHCS, April 2008
Contact: Allison Hamblin, Program Officer, Center for Health Care Strategies, (609) 528-8400, [email protected].

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