Calculating the return on investment on healthcare benefits

FDs love hard data, which can be scarce when arguing the return on investment of health perks, Sarah Coles goes hunting for substantial metrics

Executive summary
• Typically an employer can expect a £10 return for every £1 they spend on employee healthcare strategies.
• Hard figures on ROI for employee healthcare programmes and claims of links between healthy staff and increased employee engagement, creativity and energy, are tricky to prove.
• Despite having metrics, there is always room for debate about the measure of return, because in order to establish the ROI, the employer has to make several decisions and assumptions.
• There are four key metrics that can be used to demonstrate ROI on healthcare expenditure: sickness absence statistics; cost of insurance premiums; liability and tribunal costs; and staff turnover.

Finance directors frequently get frustrated with human resource departments over the lack of evidence of the cost benefits of offering health and wellbeing programmes in the workforce. To many an HR professional, it is conventional wisdom that a healthy workforce leads to a healthy business (in the financial sense), but they rarely have hard metrics to back this up.

Taking care of employee health and wellbeing, healthcare consultants say they can improve employee engagement, productivity, motivation, stress levels, and sickness absence rates. But this comes at a cost, so as healthcare bills have continued to soar, FDs are increasingly refusing to take these bold claims at face value, and are increasingly demanding concrete evidence of a return on their investment.

“There’s a trend for employers to be spending more, so they want to measure what they are getting for their money,” says Aon Consulting head of healthcare, Alex Bennett.

So FDs will naturally look to see what quantifiable return on investment a new programme will offer. Elliot Hurst, senior consultant in the healthcare and risk consultancy at Watson Wyatt, adds: “Human Resources may say they want it to help them compete for staff, or from a risk management perspective, but the financial director will be interested in the return.”

To date, hard data on ROI for employee healthcare programmes have been as elusive as the Holy Grail. Even claims of links between healthy staff and increased employee engagement, creativity and energy, are tricky to prove.

Some statistical evidence can be created through the use of internal research gathering. Justin Crossland, head of the health and risk practice at Towers Perrin, points out: “You could focus on wellbeing in a staff survey on engagement.” This would draw out gains in engagement made through the programme. However, you would still have to translate this into hard financial figures. Again the consultants will draw on their normative data, which for FDs can constitute something of a leap of faith.

And invariably talk turns to the cost of sickness absence as opposed to the increased productivity of a well workforce.

The data provided by consultants is also a controversial point. James Kenrick, leader of the Hewitt Corporate Healthcare Consultancy says: “If you look at just the payroll cost you can add 40% to 60% in soft costs – dependent on the sector.” There’s an understandable air of scepticism around these costs as it appears to be in a consultant’s interest to make sickness absence look as expensive as possible, to justify a big spend on a co-ordinated strategy.

However, consultants point out that this data is only used at the audit stage, to identify an approximate cost of ill health to the business. Once a strategy is in place, specific and accurate measurements can be substituted, so FDs are dealing with more concrete data.

Kenrick says: “After a programme has been put in place, we use a tool that brings in monthly data on absence, occupational health, employer liability, private medical insurance (PMI) and long term disability insurance, and the costs of intervention. It also brings in the soft spends such as overtime, recruitment and lost productivity, which the employer is in a position to measure. Then the model shows the return for every £1 they spend on health.” To qualify this return, employers need solid metrics to focus on.

The first metric

The first solid metric often comes in the form of sickness absence statistics. Sarah Brown, senior associate with Mercer, points out that an employer can “measure sickness absence before a strategy is introduced, and measure it again when that strategy has had time to make an impact”.

The more data that is collected on absence, the more advanced an employer can be about analysing it. They may be able to break it down, to find the cost that each health issue represents to the business. If it then introduces a strategy to deal with a specific health problem it can accurately measure the effect of that strategy.

BT, for example, worked to promote good mental health, through a health promotion campaign and raising awareness of the employee assistance programme (EAP). The result was a 30% fall in mental health-related absence.

The change in the absence rate then needs to be translated into a cost saving. Here, employers are measuring the money they are wasting by paying people who aren’t in work. On a very simplistic level, Brown says: “You can measure absence rates and extrapolate the cost. So, for example, if you have 5% absence, you are spending around 5% of your payroll on sickness absence.”

Alternatively, employers can get more sophisticated. Most employers agree a rough cost for each grade of employee, to allow them to work out an approximate overall figure.

This, however, isn’t the only cost of sickness absence. Brown points out: “The indirect costs of sickness absence can double the total.”

It will also impact productivity, for example. This again is simple to measure for some organisations. Call centres and manufacturers will be able to see the amount of value generated by each employee every day, so can calculate what is lost. For other organisations, employers have to resort to softer measures.

Hewitt’s Kenrick, explains: “We agree with an employer what factor we will use for lost productivity, so for each role such as sales, administration or senior management, we will work out an approximate cost of a day’s lost productivity. It would be possible to establish the exact cost for each individual, but it would be a full-time job and it’s not worth the expense.”

The second metric

The second solid metric that organisations can focus on is the cost of insurance premiums, such as PMI and income protection. The idea, Aon’s Bennett explains, is: “If you manage the health of your employees, premiums should fall.”

This is certainly the case for income protection (IP). Simon Curtis, a health and risk consultant with Jardine Lloyd Thompson, points out: “If you can demonstrate a fall in sickness absence, through the provision of PMI and an EAP, you can get a reduction in IP premiums – generally the market is very proactive on that.”

There is a second wave of reduction in IP premiums, when the instances of long-term sickness come down. The idea is that by utilising PMI or by changing employee behaviour as a result of health awareness campaigns, staff are less likely to suffer the kind of conditions that will force them into long-term sick leave. However, this creates difficulties in terms of measurement, as it can take decades to materialise.

The saving on PMI may also be a long time coming. Claire Witz, a consultant at Towers Perrin, explains: “You are not going to see savings on PMI in the short term if you promote it, because you will see a big take-up of things like physiotherapy. The savings will come in the longer term as the health of the workforce improves.”

If an employer uses a healthcare trust to fund private medical treatment for employees, the return is easy to measure, as the employer will get a rebate when the health of employees improves and spending falls. However, this again may take a while to materialise. An initial surge in use of the trust will push up the cost in the short term, and only after three years of falling costs will an employer be rebated from the fund.

None of these savings are impossible to prove, therefore. They simply take longer than most organisations are prepared to wait before concrete figures are forthcoming.

Healthcare consultants get around this by moving away from the specific experiences of the client. They will draw on research. Towers Perrin’s Crossland, points out: “PruHealth has done research in South Africa and has over ten years of data that demonstrates that an improvement in health sees the costs fall.”

Consultants also use statistics collated from their previous experience with other clients. Mercer’s Brown says: “We have a business case modeller. It takes into account sickness absence and income protection premiums, among other things, and we model the potential savings to be made by implementing robust systems. It is based on previous clients’ experiences, so it comes with the caveat that every employer is different.”

The third metric

The third metric employers use is liability and tribunal costs, which will quantify the effect of any poorly managed health issue. If an employer has already faced employee action, this cost can be measured before a programme is introduced and again afterwards. If claims have yet to rear their heads, the hard figures are more elusive. Hurst says you end up measuring: “semi-soft measures such as risk management improvements. If you are working in a compliant manner then you are working better and are less exposed to litigation”. This is less than satisfactory, but Brown says that these figures have also been worked into the business case modeller, so hard data is available.

The fourth metric

The fourth metric is staff turnover, and the associated recruitment costs. Turning this into a sturdy figure, however, is problematic in two ways. Firstly, even if you take the basics of recruitment specifically related to replacing employees who are long-term sick, this doesn’t tend to be recorded by employers, so you don’t have a reliable starting figure. And secondly, the link between any change in retention and the introduction of a specific policy or benefit can be hard to pin down. Hurst says: “It’s difficult to conclusively prove you can get an increase in retention and attraction by putting a programme in place.” So you don’t have a robust figure on the change either.

Consultants manage this with their business case modellers. Before any strategy is introduced they can take normative figures. Then once it is in place Hewitt’s Kenrick says: “The employer needs to set up systems to assess the cost of overtime and recruitment for replacements.”

So despite these four metrics, no measure of return, however thorough, can be entirely solid. There will always be room for debate. This is because in order to establish the ROI, the organisation or the consultant must make several decisions and assumptions.

If, for example, they use sickness absence as a measure, there are assumptions to be made about the reasons for a reduction in sickness absence. Certainly a 5% reduction in absence may have coincided with a healthy living promotion or a new EAP, but no one could prove whether or not one caused the other, or another intervention was the cause. Mercer’s Brown says: “One of the other issues is that absence isn’t just dependent on healthcare, so there are limitations in saying we spent x and saved y, so that’s our ROI.”

Perhaps more importantly, an organisation will have to make decisions on the costs they include as part of their model. Bennett says: “We have spoken to clients who have a formula. We would ask, are you counting indirect costs or direct costs? There’s no end to what you can measure, and no end to how many factors you can count as valid or invalid.”

Aside from this, there’s a danger that if you focus on what you can measure alone you miss the bigger picture, because as Towers Perrin’s Witz says: “Not everything that is meaningful can be measured.”

It may, for example, be impossible to measure the difference in a senior executive’s productivity the day after a health screening where he was given the all clear over something he had been obsessing over for months. However, there would be few people who would argue that productivity wouldn’t improve as a result.

So producing a demonstrable return on investment isn’t the only reason for having a healthcare policy in place. However, where you can prove a return, the figures are compelling. Kendrick says: “Typically an employer can expect a £10 return for every £1 they spend. If you tell a finance director about this kind of potential they’ll ask ‘well can we spend £2 and double the saving?’.”

Stage 1: Audit
• Sickness absence costs
• Overtime for replacements (normative)
• Recruitment of replacements (normative)
• Loss of productivity (normative)
• Stress on employees left behind (normative)
• Income protection premiums
• Private medical insurance premiums
• Employer’s liability insurance premiums
This will provide a cost of sickness absence in an organisation

Stage 2: Strategy
• Identify trends in sickness
• Address with appropriate benefits and strategies
This will identify the strategy required, and therefore the necessary outlay for the organisation

Stage 3: Monitoring your Results
• Sickness absence costs
• Overtime for replacements
• Recruitment of replacements
• Loss of productivity (through formula agreed with employer)
• Stress on employees left behind (normative or through staff surveys)
• Income protection premiums
• Private medical insurance premiums
• Employer’s liability insurance premiums
• Occupational health spends on interventions
This will identify the new cost of sickness, and the difference will be your ROI

How many employers calculate the return on investment on their healthcare spend?
71% don’t calculate the ROI
22% plan to start calculating the ROI
5% already calculate ROI
Source: Employee Benefits/HSA healthcare researched 2007

One company’s experience…
Sarah Brown, senior associate with Mercer, recorded the following results after implementing an integrated health programme for a professional services client:
• 15% reduction in frequency of absences for all health-related causes
• 7% reduction in average duration of absences
• 50% reduction in the proportion of people still absent after three calendar months
• Annual absence cost savings of £500,000

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