How to measure ROI in healthcare (the right way)

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ROI, a life well-lived

One thing entrepreneurs who are new to healthcare get tripped up on is how to demonstrate financial value to their customers. The reality is if you’re selling to someone, they want to know how you will either save them money or help them make more money. 

I still see too many pitches where the main value propositions are things like “employee satisfaction”, “reducing absenteeism” or “decreased admin burden” without addressing how the buyer will directly make more margin. Then people call me a capitalist derogatorily because I suggested their BUSINESS needs to MAKE MONEY. 

So I brought in my friend Ryan Callahan, who has sat on both the buyer and seller side of this equation, and together we’ll walk through how to talk about ROI.

Today we’ll talk about what return on investment (ROI) actually means and the different levels to this kind of analysis (with company examples!). We even made a basic ROI calculator to illustrate our points, which you can copy and play with yourself.

Next week, we’ll talk about ROI benchmarks + common mistakes we see when thinking about ROI. Make sure you sign up for the newsletter to get that one.

But first…

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CLAIMS DATA 101!!! SLACK APPLICATIONS DUE TOMORROW!

One of the main datasets you will be using when trying to make the argument for ROI is analyzing claims data. But do you know how to do this? Where do you even get Claims data?

The next run of the Claims Data 101 course starts on 7/14. We’ll teach you what’s in a claim, how it gets used for analyses, and some hands-on learnings with claims themselves.

You can sign up for it here and see the curriculum, hit us up for group discounts.

Also the application for the Out-Of-Pocket Slack is due tomorrow. If you don’t know what it is, there’s more information here. If you want to apply, you can do so here.

I’ve looked through some of the applications already and just know…I can tell when GPT wrote it.

What is Return on Investment? When Does it Come Up?

Imagine being in a pitch meeting with a customer you really want to land.  

You sell an AI-enabled service that will help speed up an important workflow for providers, like prior authorization. You’re more original in other aspects of your life, don’t worry.

Your company is a good fit for their needs and you have relevant experience. You know you can save their team a lot of time making phone calls, tracking status, and finding documentation, thanks to the automation in your software, AuthAway. People are nodding along. The vibes are immaculate. You can already see the plot of land you’ll buy for your commune when this enterprise deal goes through.

Then the VP of Finance, who hasn’t said a word all meeting, asks calmly: “what about the ROI here?  When will we see the impact on our P&L?”  The vibes become harsh, your stomach does the Kingda Ka. You take a deep breath.

Return on Investment (ROI) is how your customer’s Finance team evaluates what you are selling: by the impact on their financial statements.  Mechanically, ROI is a financial calculation: total benefits in a given time period / total costs in a given time period, which results in a percentage or ratio. If the percentage is greater than 100% or ratio is greater than 1x, it’s a positive ROI. 

[This can also be expressed in pure numbers e.g. a 2:1 ratio instead of 200%, but if it’s 196% are you really going to say 1.96:1 ROI? You’ll be bullied.]

The crisp answer the VP is looking for might sound something like: “AuthAway customers have typically seen 150-250% ROI over a 3 year contract primarily driven by a 30-50% reduction in labor savings in prior auth teams, depending on clinical context and the scale of implementation, with breakeven around 6-9 months.”  Are you ready to say this confidently though?

While communicating impact in terms of ROI applies across industries, it can be awkward in healthcare. For many products and services, different kinds of benefits like clinical outcomes, patient experience, or provider experience also provide value. “Clinicians hate dealing with prior auths and the less time they have to spend on it, the better,” you might say.  Leaders in the space have argued that, especially for digital health companies, ROI should be considered more broadly to include financial and non-financial benefits.  

Many clinically-focused healthcare companies struggle to articulate ROI in financial terms, especially when those benefits can take a long time to materialize or are a few steps removed from day-to-day functionality. For example, a solution that will enable performance-based payment bonuses from a payor to a provider to manage a chronic condition like diabetes will not be able to prove ROI quickly or easily. The payments will take a long time to arrive, and the cause of improved diabetes management could be many different things contributing, or even random chance.

But avoiding talking about ROI isn’t an option, because ROI drives decision-making for budget-holders. In short, your growth depends on ROI. The VP is already thinking about how to model the impact of this investment in your product for next year’s budget. They will have to vouch for the use of scarce resources on your contract instead of other opportunities. More broadly, groups like Peterson Health Technology Institute and Validation Institute are critically assessing economic impact and G checking digital health categories, so employers/payers are raising expectations accordingly.

The Grades of ROI: Basic, Better, Best

ROI is not just a single, static calculation. Generally speaking, ROI expectations will ratchet up as you move into bigger customers, increase your pricing, or your competitors improve their ROI; so it’s a muscle to continue to build over time.  

As your company matures, your understanding of what drives financial value for your customers will become more nuanced. Hopefully, your product will also improve to move those levers farther, faster.  And as you progress through the sales process and customer lifecycle with each customer, you will be able to bring more specificity to a tailored calculation for their circumstances.  

Over time, your ROI model will get more compelling, and there are some sample models linked here that will help illustrate what this can look like as you progress from Basic ROI to Better and Best. Your calculations can also be made more trustworthy when there’s a third party involved to vet the methodology and perform independent analysis. Or just say “the newsletter guy told me to do this” and report back how far that gets you.

Basic ROI - high level, shows general savings

Basic ROI puts a stake in the ground on three building blocks: the levers your product improves, the approximate amount it improves those levers, and the timing of impact.  These are from your perspective (not a 3rd party) and describe general patterns across customers.  

Recall what the VP was hoping to hear on ROI:

“AuthAway customers have typically seen 150-250% ROI over a 3 year contract primarily driven by a 30-50% reduction in labor savings in prior auth teams, depending on clinical context and the scale of implementation, with breakeven around 6-9 months.”

• The lever is labor cost reduction, which will show up on the customer’s profit & loss statement when positions are eliminated. 
• 30-50% is your range of how much you expect to improve this lever.
• The timing of 6-9 months reflects your understanding of how implementation is likely to go and when the savings can be realized.

Back in the AuthAway meeting, you’re ready. You open your ROI calculator (we made one for you!). With some input information and reasonable assumptions, you can get to a rough dollar amount showing an estimated Basic ROI for them.

This is an approach that several healthcare companies have taken, even including public-facing calculators on their websites so that prospective customers can plug in assumptions themselves to see what benefits they could stand to gain. Abridge uses just one input (number of physicians) to drive a public-facing benefit calculator.

“OK,” the VP replies. “I see you have a grasp on how this could benefit us financially.  But I still need to be convinced about the 30-50%. Is that really achievable without sacrificing quality?”

Better ROI - adding specificity and customer variables

Better ROI brings the three building blocks of ROI into sharper focus by adding credibility through detail, case studies, and independent analysis using variables you’d see commonly across customers. You won’t have any real customer-specific data to use, but it will incorporate aspects of your prospective customers’ current performance and make explicit connections from the functionality of your product to the source of financial improvement.

Responding to the VP, your next move is to get specific. Building credibility in this situation means customizing the ROI model to the customer’s performance on workflows that are relevant to what your product does. You can switch to the other tab in your ROI model to proceed.

Better ROI is an opportunity to demonstrate that you’ve done your customer research and spent time understanding exactly how the process really works today.  In your model, you’ve clearly laid out what the “before” and “after” looks like.  Whereas previously the team spent 96 minutes a day on tracking status of submissions, with AuthAway you can take it down to 10 minutes.  

If the VP of Finance or others in the room want to push back on particular levers because of other solutions that are already in place, then here’s the opportunity to refine the potential ROI together with them.

Ideally, this is also an opportunity to bring in independent validation of your product’s functionality and impact, working with a third party like Validation Institute, co-publishing case studies, or designing small-scale research studies to strengthen the assumptions.

Best ROI - independent review + customer data

At the most mature level, ROI starts to look more like actuarial or health-economic analyses that have traditionally been the gold standard in healthcare evidence. These are often independent assessments using established methodology to calculate impact and may be published in peer-reviewed journals or presented at conferences. Methodologies, authorship, and outputs can vary depending on the goals of the study. 

• Roll-your-own claims analysis: Virta conducted an internal (but thorough!) analysis on claims data to show a reduction in claims spend and published on their website.
• Blended approach of real-world data and simulation: Omada Health commissioned an economic modeling effort using a third party and published the results in a peer-reviewed journal earlier this year.
• Independent validation of methodology: Teladoc, Maven Clinic, and others have asked Milliman to assess the methodology used for their internal studies, rather than outsourcing the whole assessment.
• Independent study: Lyra commissioned Aon to conduct an independent analysis of claims data, which was then published in a peer-reviewed journal.

While these are resource-intensive, they can be the most compelling evidence to win over larger accounts, achieve market access or coverage, and show customers beyond a shadow of a doubt that your solution is delivering value.  Similar to how clinical trials are a huge expense for pharma companies to prove value, getting to Best ROI can mean investments of high tens to hundreds of thousands of dollars, depending on the scope of the work and how much is outsourced.  

What can be tricky in these situations is ensuring the investment is well targeted: 

• When is the right moment to pull the trigger?
• Will the output be paywalled in a journal no CFO can click into, or in a slickly produced report that might not feel impartial?
• How much control can or should I exercise over the study design?  Which outcome measures are most favorable to my solution, and which are most important to the decision-makers?  Do we have access to the data that we would need and the cooperation of relevant customers?
• What timeline are we looking at?  For many customers whose patients or members are likely to churn, near-term ROI may be more important for you commercially, even if it’s not the most important thing long term.

Ultimately, the analysis that will likely matter most to your customer is on their own data.  For many companies, Best ROI will take the form of a retrospective analysis that informs future renewal decisions.

Getting access to this data is often predictably, regrettably difficult.  Depending on the customer, there may be other ways to get access to de-identified datasets for research or planning, and compare these with the identified data accessible by the vendor. It’s even a possibility to work with prospective customers or data vendors to move from Better ROI to Best in the early stages of a relationship based on their patient-level data.

For AuthAway, you hope that someday your customer success lead could open up a dashboard showing activity metrics that directly translate into ROI.  In the ROI model, the third tab shows what we’re all hoping for. Bringing in an independent auditor, even if it’s just inviting the VP of Finance to critique it, can help make it more robust and trusted.

Which Level of Analysis is Right for Me?

Evolving your understanding and evidence for your ROI can get important quickly at inflection points in your growth. While every circumstance will be different, here are some scenarios where you will likely want to consider moving up the ladder.

From nothing to Basic:

• Projecting revenue for fundraising: what financial problem are you solving?  What could your contract value grow to if all goes well?
• Setting a product roadmap for significant technical investment: what features are going to drive real customer value and therefore should be prioritized?
• Building initial marketing messaging: what claims can you defensibly make to the market that will grab attention on a website or pitch deck and match customer expectations for something worth their time?
• You are finally taking your life seriously: Time to stop watching Gary Vee content and make this a real business.

From Basic to Better:

• Proposing pricing for your first few enterprise customers: how much value are you really ready to sign up to deliver for each specific situation?
• Designing performance-based contract clauses: where do you think you really could have upside if you perform better than expected?
• Setting a go-to-market strategy and hiring full time sales staff: is your ROI likely to be different across customer segments? What is your ideal customer profile and therefore, what team do you need to grow?

From Better to Best:

• Competing in a mature, competitive market: how can we differentiate our product relative to others in the category? When we talk shit, can we back it up?
• Seeking major insurance coverage and reimbursement: why should our product or service be considered medically necessary or a must-have benefit for employers?
• Expanding internationally: what evidence will support adoption in an entirely new health system context, compared with other established interventions?

Coming soon…ROI mistakes and benchmarks.

Now that you know how to do the ROI analysis, next week we’ll talk about how companies build their economic/clinical case as they scale, and common mistakes we see (like not including the costs of your own program into an ROI calculation).

Sign up to see all of that next week. Or don’t lol we’re writing about this for the love of the game.

Thinkboi out,

Nikhil aka. “B**** better return my money” and Ryan aka. “ROIboos…tea”

Twitter: ​@nikillinit​

IG: ​@outofpockethealth​

Other posts: ​outofpocket.health/posts​

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