The United States spends far more per capita on health care than any other developed nation. In 2006, our healthcare costs totaled $2.08 trillion, representing 16% of the gross domestic product. In fact, healthcare spending is growing at a faster rate than that of our economy overall.
Given this high spending level and our challenging economy, healthcare leaders must find ways to spend money more wisely than ever. They need accurate economic measurements to guide spending decisions. Analyzing the rate of return on investment (ROI) is one of these.
ROI is the ratio of net money saved to money spent (money saved less money spent), expressed as a percentage. ROI analysis is done from the perspective of the stakeholder/investor (such as a hospital). Types of healthcare investments include not just equipment and other tangible assets but human resources, such as hiring of extra staff or staff-development programs.
This article describes the general steps used to calculate ROI, using a case study that centers on whether a hospital should invest in a staff-development program that could improve nurse retention and morale.
Step 1: Define the issue, proposed solution, and expected outcomes
The first step in an ROI analysis is to clearly state the problem or issue, the proposed solution, and what you expect the solution to accomplish.
Example: Nurse Manager Jones has been having a morale problem on her unit; two nurses have quit in the last 6 months. At a network meeting of affiliated hospitals, she learns of a fellowship for staff nurses called Establishing Evidence-Based Practice (E-EBP). Two managers who sent staff nurses to this fellowship describe the returning nurses’ enthusiasm for the program and explain how they developed projects involving the entire staff that promoted a more professional workplace. Both managers report they no longer have staff turnover problems. Manager Jones wonders if sending several of her staff nurses to the E-EBP program would have similar effects in her unit.
Step 2: Meet with key administrators
Before starting an ROI analysis, meet with key administrators to:
- establish a consensus that the issue is important for your organization
- identify critical staff members (such as financial personnel)
- agree on the scope or perspective of the analysis.
These steps not only promote early “buy-in” by key stakeholders but help you gain access to needed financial data and expertise for guidance on which costs and benefits to include and what timeline to consider for the ROI analysis.
Example: Nurse Manager Jones meets with the hospital’s chief nursing officer (CNO) to discuss the E-EBP program as a strategy for improving nurse morale and decreasing turnover. The CNO expresses an interest in this idea, and asks Jones to work on an ROI analysis in conjunction with the directors of human resources and staff development.
Step 3: Determine costs and benefits
Next, carefully determine the costs of implementing the proposed solution and identify the expected benefits (consequences) of the solution. Costs include the amount of money that implementing the solution would impose. Benefits generally refer to the amount of money that would be saved by implementing the solution. Once you identify upfront costs and downstream consequences, you must convert them into a dollar value.
Example: Tuition for the E-EBP program is $5,000 per participant. Manager Jones would like to send two nurses to the program, which meets one afternoon each week for 10 weeks. The cost of hiring nurses to replace the two who would attend the program would be $200/day times 10 days. With help from the human resources director, Jones determines that the potential financial consequences of not sending nurses to the program—increased turnover in the form of one nurse quitting and the need to hire her replacement—would be approximately $50,000.
Step 4: Calculate the projected financial impact
Several common metrics are used in ROI analysis to measure the economic impact of a proposed solution. (See Common metrics in ROI analysis.) Each metric is crucial to accurate calculation.
ROI metrics aren’t independent or mutually exclusive; each one must be considered individually. Thus, even when an ROI appears favorable, if the costs of the proposal are astronomical or the benefits negligible, the other metrics may be only marginally relevant.
Example: To calculate the ROI metrics for sending nurses to the E-EBP program, Manager Jones estimates that for a $14,000 investment, the hospital would save $36,000, translating to an ROI of 257%. (See E-EBP fellowship: ROI analysis by clicking on the PDF icon above.)
This relatively simple example shows a very high ROI. In most cases, the situation is more complex, with costs and benefits occurring over multiple years. For multiyear proposals, the ROI includes the interest rate the money would earn and/or the ROI on other potential uses of the resources. While the literature shows high ROIs for proposed solutions aimed at decreasing nurse turnover, an ROI of 10% to 25% may still be viewed positively.
Step 5: Communicate results
Effective communication of findings to critical stakeholders is vital. Once the ROI has been calculated, your first instinct may be to schedule an immediate executive-level meeting to present findings and recommendations. While that may work in some cases, in others it’s best to meet with stakeholders individually before holding a formal meeting. This allows key administrators (who can provide critical support during the final discussion) to ask questions.
Example: Manager Jones meets individually with the CNO and directors of human resources and staff development. The staff development director asks questions about the content and curricula of the fellowship; Jones provides the fellowship’s syllabus and contact information. The CNO asks how turnover costs were estimated; Jones explains the calculations, which include temporary replacement costs (using an agency nurse) and the costs of advertising for, interviewing, and orienting a new hire. After all questions have been answered, the CNO asks Jones to report on the analysis at the next managers’ meeting.
A boost to cost containment
ROI analysis is a useful tool for nurse managers seeking innovative ways to solve workplace problems. For a novice, calculating ROI may seem overwhelming. But as with many tasks, it’s easier if you break it down into separate components—and ask for help from involved stakeholders.
Of course, nurses and administrators are concerned about more than just dollars. ROI results should be used within an appropriate context and should consider the organization’s overall goals and mission.
Be aware, too, that calculating ROI may be just the start of the decision-making process: Maximizing net benefits without considering other aspects of a problem isn’t necessarily the best way to make decisions. And once a decision has been made, outcome data must be collected to determine if the predictions were accurate. ROI analysis is a way for healthcare organizations to contain costs—but it’s just one aspect of the factors that should inform expenditure decisions
Heffler S, Smith S, Keehan S, Borger C, Clemens MK, Truffer C. U.S. health spending projections for 2004-2014. Health Aff (Millwood). 2005;Suppl Web Exclusives:W5.
Pine R, Tart K. Return on investment: benefits and challenges of baccalaureate nurse residency program. Nurs Econ. 2007;25(1):13-18, 39.
Patricia W. Stone is an Associate Professor at Columbia University School of Nursing in New York, New York. Jennifer A. Smith is a Senior Associate Dean at Columbia University School of Nursing. Kevin D. Frick is an Associate Professor at Johns Hopkins Bloomberg School of Public Health in Baltimore, Maryland.
This project was funded in part by a grant from Jonas Nursing Excellence Through Evidence-based Practice Program, which in turn was funded by the Jonas Center for Nursing Excellence and the Registered Nurse Division of 1199 Service Employees International Union, New York’s Health and Human Service Union (RN Division of 1199) RN Planning and Placement Fund. Additionally, Drs. Stone and Frick are funded through the Center for Evidence-based Practice in the Underserved (P30NR010677) to assist nurse researchers in conducting economic evaluation.