December 15, 2017

David Donn: The Fallacy of ROI as a Measurement Tool

By David A. Donn, President, David Donn Consulting, Inc.

David DonnHow 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:

ROI Equation

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:

Company A
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.

Company B
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?

About David Donn
Mr. Donn is the founder and President of David Donn Consulting, Inc. (DDC), a specialized workers’ compensation managed care advisory and research firm exclusively serving the employer and carrier community.

Mr. Donn is the former Vice President of Employer and Occupational Services Group (EOS), the former workers’ compensation managed care subsidiary of Health Net, now part of Aetna/Coventry Health Care, one of the largest health care companies in the country. At EOS, he implemented practical solutions to clients’ loss control needs and structured innovative cost containment programs that increased clients’ savings while reducing their costs. In addition, he designed, directed and executed all business development initiatives for the company’s western region. In Mr. Donn’s 7-year career at EOS, he generated $35 million in new revenue with his unique consultative approach for such clients as Georgia Pacific Corporation, Kaiser, Chevron, Pacific Gas and Electric (PG&E), Atlantic Mutual Companies, Fremont Health and El Dorado County.

Mr. Donn is a frequent speaker at various industry conferences and their chapter affiliations for RIMS, PARMA and the Industrial Claims Association. Notable keynote speeches by Mr. Donn include the 2004 “Best and Brightest/Hot Topic Educational Forum” for the California Coalition on Workers’ Compensation (CCWC) and “Transforming Knowledge into Action & Action into Profitability” at the 2009 Michigan Self-Insurers’ Association (MSIA) Spring Conference. He has also spoken at the Missouri Self-Insurers Association’s Annual Conference and the National Council of Self-Insurers Annual Conference and most recently for Busines Insurance Magazines virtual conference on claims/managed care bundling or unbundling.

Mr. Donn holds a degree in finance from New York University’s Stern School of Business and has taught practical economics, finance and investments at the prestigious Lowell High School in San Francisco as part of the Junior Achievement program for the Bay Area. He currently resides in San Francisco, CA, with his wife Sarah, son Oliver and French Bulldog Owen.

David Donn Consulting, Inc. (DDC)
DDC is the first independent workers’ compensation managed care consulting and research firm to exclusively serve the employer community. Our scope of services are concentrated in workers’ compensation managed care program evaluations and vendor selection services. Clients are full and partially self-insured private and public entities, insurance carriers and JPAs.

From its inception in 2002, DDC was created to provide its clients with practical consulting services aimed to increase savings, reduce costs and introduce leading edge design ideas into workers’ compensation managed care programs. Many of our practical “firsts” have become standards for the industry. DDC’s sole aim is to help our clients maximize their managed care goals by providing unbiased, relevant information and advice. To ensure this objective, we limit our business exclusively to managed care consulting. DDC is not affiliated with any managed care service provider nor does it receive financial remuneration from managed care service providers.

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