Good return vs. bad return on investment and how your health plan can tell the difference
When shopping for a payment integrity solution, you will understandably have many questions. Your COO is going to wonder how this software will improve operations, your IT Director will have questions about network integration, and your CFO may have the most pressing question of all: What’s the ROI? Because payment integrity has become such an integral part of profitability, health plans have to emphasize accurate return on investment forecasts and measure actual results relative to those forecasts continuously.
So, before you purchase a payment integrity solution, let’s run through how to measure ROI, and what denotes a good ROI vs a bad ROI in this market.
To determine your ROI model for payment integrity, there are 5 broad areas of value for health plans and payers. You can use the following categorical variables as points of measure to determine the value of your investment as you build your ROI model. We will also walk you through each area with an example using a 3 million member health plan.
Financial Value Area 1: Ability to Optimize the Balance of Recoveries Between Internal Activities and 3rd Party Services
If your payment integrity solution allows vendor post-pay work to shift in-house (instead of being outsourced), it is more cost-effective for health payers. The variables are:
- Current vendor post-pay recoveries: How much is the plan realizing in recoveries from third parties?
- Estimated percentage shifted in-house.
To calculate the net savings on this variable, multiply the total recovery dollars shifted in-house by the difference between your average vendor fee and your average internal cost of recovery. The difference between the cost of internal recovery versus the average vendor cost can translate into significant savings.
For example, a plan calculated its annual post-pay vendor recoveries at $40M. This plan was able to shift 35% of that recovery work in-house, equating to $14M in recoveries shifted. Assuming an average vendor rate of 15% and average internal cost of recovery of 6%, the plan is able to save nearly $1.3M.
Financial Value Area 2: improvements to Vendor Efficiency
Does the payment integrity solution help improve vendor management? Some do, and some don’t. For those that offer improved vendor management tools, here are the variables:
- Vendor post-pay recoveries after shift: What are the recoveries in dollars post-shift to more in-house recovery work?
- Vendor lift.
To calculate net savings, subtract the vendor fees from the increased vendor recoveries to yield a net recovery amount to the health plan or payer.
Following the example above, let’s say the plan now has $26M in post-pay vendor recoveries after the in-house shift. The plan realized a 30% “lift” in vendor performance through the incorporation of transparency and accountability tools, translating into $7.8M in increased vendor recoveries based on the current vendor footprint. Subtracting an average vendor fee of 15% from these increased recoveries, or about $1.2M, yields the plan an additional $6.6M in recoveries.
Financial Value Area 3: Ability to Expand the Current Vendor Footprint
With the proper solutions in place, health plans can go on the offensive by adding new vendors and stacking those vendors for optimal performance. It’s not uncommon for health plans to replace the entire amount of recoveries shifted in-house from Financial Value Area 1 to additional targeted vendors who are focused in a particular segment of payment integrity.
Continuing with the example, let’s assume that $14M of additional recoveries are gained through the expansion of the vendor footprint. After netting average vendor fees of $2.1M (15%), the plan realizes an additional $11.9M in recoveries.
Financial Value Area 4: Ability to Expand Pre-Pay Avoidance Internally
Total payment integrity encompasses robust preventive capabilities to avoid messy recovery scenarios in the first place. Pre-pay recovery growth can be calculated using the following variables:
- Pre-pay internal recoveries: How much is the plan recovering in a prospective fashion?
- Internal recovery growth.
To factor the potential pre-pay recovery growth savings, subtract the internal cost of recovery from the internal recovery growth amount.
The same plan we have been following also recovers $40M prospectively on an annual basis. By factoring in a modest 10% internal recovery growth metric, the plan is able to realize net pre-pay recovery growth of nearly $3.8M after factoring in the internal cost of recovery.
Financial Value Area 5: Reduction of Administrative Costs
Improved administrative efficiencies through a payment integrity solution can vastly contribute to net savings by reducing administrative costs. The variables are:
- Total payment integrity administrative costs: This figure is derived by estimating the number of internal PI staff and multiplying by the average staff member fully-loaded cost. There are also additional department administrative costs, like supplies, phones, etc. that can be included.
- Administrative cost reduction.
Your net savings can be configured by the following calculation: PI costs x cost reduction % = Net Savings Concluding with our example above, let’s say the health plan estimates its total payment integrity administrative costs at $2M. Assuming a 10% cost reduction yields an additional $0.2M to the health plan.
The Good, The Bad, The Average: ROI Rates
Now that you’ve got checkpoints in mind for your ROI, you may wonder what the benchmark is for these values in the payment integrity market. Here’s the standard calculation for ROI rate:
ROI = [(Financial value – Project cost) / Project cost] x 100
If you aren’t sure how to calculate financial value and project costs, here’s an article offering up some helpful advice.
The best return on investment for a payment integrity solution is one that offers financial value in all five areas as identified above. The only payment integrity solution on the market that meets that criteria is Pareo™. The metrics and percentages identified with each financial area above are typical savings that we see with clients after they have implemented Pareo™. To summarize by category:
- Financial Value Area 1: Ability to Optimize the Balance of Recoveries Between Internal Activities and 3rd Party Services with Pareo™
- A 35% shift to in-house post-pay work is typical.
- For the health plan above, this equates to $1.3M.
- Financial Value Area 2: Improvements to Vendor Efficiency with Pareo™
- A 30% “lift” is common through increased vendor efficiencies.
- For the health plan above, this equates to $6.6M.
- Financial Value Area 3: Ability to Expand the Current Vendor Footprint with Pareo™
- The equivalent of the dollars shifted in-house can easily be realized by expanding the vendor footprint
- For the health plan above, this equates to $11.9M.
- Financial Value Area 4: Ability to Expand Pre-Pay Avoidance Internally with Pareo™
- Internal pre-pay avoidance comes into greater focus, and a 10% improvement is common.
- For the health plan above, this equates to $3.8M.
- Financial Value Area 5: Reduction of Administrative Costs with Pareo™
- Administrative costs decreases of 10% is a good benchmark.
- For the health plan above, this equates to $0.2M.
With Pareo™, total savings using the health plan example above yields $23.8M in tangible savings over the first 2 years. This can easily translate into a realized 4% or higher return of annual claims spend. After factoring in the 2-year investment in Pareo™, we typically see an 8-10x return on investment.
You can use this ROI rate as a benchmark to compare other payment integrity plan options. By taking a methodical approach through each Financial Value Area, you can compare platforms side by side to determine which solution yields the highest potential ROI.