Economic Evaluation of an Investment in Medical Websites and Medical Web-Based Services
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- 8.1ROI in IT and Technology Investments
- 8.2ROI in Healthcare
- Individual Investment in Healthcare
- ROI in clinical technology
- 8.3Benefits of ROI
- 8.4Concerns, Myths and Barriers of ROI Application
8 Return on Investment (ROI)According to the Encyclopedia of Business Terms and Methods (2011) “the Return on Investment (ROI) analysis is one of several commonly used approaches for evaluating the financial consequences of business investments, decisions, or actions”. ROI analysis examines the magnitude and timing of the investment benefits in direct comparison with the magnitude and timing of investment costs. Endogmus et al. (2004) give a definition of ROI based on a mathematical formula. They define it as the ratio of net benefits that a program produces to the costs that it needs in order to operate and achieve the aforementioned benefits while Stone (2005) defines ROI as “the ratio of money saved to money consumed , expressed as an percentage”. During the ROI calculation, the cost of the programmes implementation are subtracted from the benefits, creating an adjusted benefits-to-costs ratio that is the ROI percentage. Moreover Dowson (1983) states that “investments should be made if their returns are forecast to be greater than the risk-adjusted cost of funds or the returns of alternative available investments”. According to Phillips P. & J (2008), ROI begun to be applied from 1970 as an education programme until entities in the manufacturing and service providing sectors where the first to adopt this method. Now web-based services of ROI can be found also in government structures and organizations. They also state that nowadays most executives are familiar with the term “return on investment” and understand its usefulness. There are many examples of successful application of ROI and typically ROI process costs account for only 3-5% of a programme’s budget. ROI is usually applied by large organizations with large and rapid growing project budgets that are focused on measuring impacts and results, require high accountability and are keen to apply changes.
Moreover, examining the use of ROI in the Information Technologies field, Endogmus et al. (2004) state that “ubiquitous and reckless promotion by vendors, consultants, and marketing gurus has diluted the expression return on investment into an umbrella term that can mean anything from profits to competitive advantage”. Especially in the IT sector Endogmus et al. (2004) state that ROI is treated as a “gimmick” because of its misuse and the governing misconceptions about ROI can achieve. Furthermore, Curbaxani et al. (1998)state that several empirical studies have shown that there is a positive relationship between the investment on new technologies and the Return of Investment as it is measured through changes (positive or negative) on the production function of an entity or organization. This idea was based on the “Productivity Paradox” that was defined by Wetherbe et al. (2007) as “discrepancy between measures of investment in information technology and measures of output at the national level” and it was believed that new technological investment will improve productivity but the overall growth does not seem to support this opinion as, from 1970 to 1990 when great technological progress was made the overall growth was increasing in a very slow rate. On the other hand, Grudin (2004) suggests that organizations are really keen on measuring the economic return on technology investments. Despite the fact that, in many cases, the aim of a new technology investment is to facilitate and enhance procedures and routines, it is always assumed that these will be accompanied by a positive return on investment. He suggests that there are no scientific ways to predict a return of such a kind and the actual measurement of costs and benefits after the implementation of a new technological investment is very challenging. In order for organizations to present evidence of a positive return of a technological investment, usually they are using general performance indicators, such as productivity measurement. In the case of usage of the productivity measurement to assess a positive ROI of a technology investment, the supporting argument is that this technology resulted in more productivity in less time. As Grudin (2004) suggests, although this might seem a logical argument, the impact of a technology investment on productivity is often very difficult to be identified and measured. Based on Joseph McGrath’s table of Group Interaction and Performance (Table 2), Grudin (2004) states that this ROI perspective focuses only on performance, ignoring all the other “harder-to-be” measured cells of the table. But any event in one of the concepts of the other cells can affect positively or negatively the performance without this impact to be attributable to new technological investment. This can result in the adaptation or rejection of a new technology based on non-concrete evidences.
Table : Group Interaction and Performance (Joseph McGrath, 1984 8.2ROI in HealthcareAccording to Stone (2005), as in all organizations, healthcare also needs an accurate measure of its return on investment to enhance decision making process. Stone (2005) emphasizes that nowadays the demographic changes, the high-cost medical technology and the current/past attempts to make improvements in healthcare systems have led towards a decision-making trend completely focused on healthcare cost minimization and efficiency improvements. Moreover Stone presents a projection of cost in the future that assumes a rice of healthcare cost in the USA from the 14.9% of the USA domestic product in 2002 to 18.4% of the USA domestic product in 2013. Therefore the need for evaluation tools and the application of ROI in order to enhance decision making process has become an issue of vital importance. Fitzner and Watson (2005) report that medical management companies use majorly utilization management, disease management and case management, to measure and control the relationship between cost and quality of the medical services delivered, but because of the lack of standardisation of the ROI process and methodology in healthcare this leads continuously into large variations in the estimations. Moreover, Nordhaus (2002) estimated that by using as a value for human life a statistical value of $3 million and available data for the healthcare costs and life expectancy every dollar spent on healthcare has a return of $1.90 to $2.60 as healthcare benefit. Furthermore, research conducted by Cutler and McCellan (2001) has shown that the return on investment as benefits to five healthcare conditions including heart attacks, depression, cataract breast cancer and low weight infants, from 1950 to 1990, was 6 times higher than the initial investment. In addition to the above, a review on 391 studies concerning the application of ROI in Healthcare, conducted by Luce et al. (2006), have shown that the ROI (presented in monetary units not as a percentage) ranged from $1.55 to $1.94 in overall health for an additional monetary unit spent. They have also shown that the ROI of major medical innovations ranged from $1.12 to $36.81 for an additional monetary unit spent. Individual Investment in HealthcareDardadoni and Wagstaff (1987), state that the optimal investment in healthcare maximizes the net present value of the healthcare services offered to the public. They concluded in the fact that the willingness for the implementation of a healthcare investment is completely irrelevant to the consumption decisions and so the demand elasticity for healthcare services is 0. Moreover, they suggest that if uncertainty is taken also into consideration, in the case that the investor is totally risk averse, then health as a good can be considered as a regular good totally linked to the income and utility functions, with the people with higher income to be spending more in healthcare investments. On the other hand Selden (1993), pointed out that if the utility function presents absolute risk aversion, then the income elasticity presents a negative relationship with healthcare to be considered as an inferior good. As Chang points out individuals have the dilemma either to spend their income on consumption or to invest on health. Uncertainty makes this choice difficult. If an individual suffers from a medical condition then there is strong possibility that he will choose to invest in health and there will a bit less uncertainty in the model. Uncertainty makes health seem a risky asset while income savings can be considered a risk-free asset, since market interest is assumed to be constant. So without any exogenous influences the individual has to choose between a risk-free and a risky asset.
Frisse (2006) states that there are very few studies on ROI in healthcare technology and the field is considered “incomplete” because it does not take into consideration the perspective of the patients and the medical practitioners that are affected by the technology in healthcare. ROI of medical technology, from the patient’s perspective, is measured in terms of how safer it makes the provided medical services and how much it enhances the total effectiveness of the healthcare. Moreover, Frisse (2006) emphasizes the fact that in healthcare, in contrast to other economic sectors that produce much less gross domestic product than the medical system itself, the investment on new technologies and information systems is considered as a “debate” rather than a necessity. Finally, he emphasizes that as the costs needed for medical technology are significant growing, the healthcare systems are called to make large investments, and the risks of not achieving the system implementation and more general the financial risks for the hospital are becoming greater, the need for ROI application comes to the foreground and is considered more and more crucial.
Furthermore, ROI is a result-based process, strictly focused on the results of a programme, thus making also analysts and decision makers that apply this evaluation method to focus more on the measurable objectives of the programme. This focus on the results often spreads also to all the programmes of the entity and becomes an “entity policy” or “entity philosophy” improving gradually all the entity’s processes. Moreover, the adoption of the ROI methodology to evaluate organization’s programmes and processes can result in a change in management thinking, since managers can see that through ROI programmes can make viable contributions to their objectives, since by using ROI estimation they can better convince their superiors and sponsors. ROI calculation can also be used to convince managers that the budget allocation on a programme or a number of programmes is really an investment toward the strengthening of the organization’s profits and viability, and not just an expense. Finally, while comparing ROI with the Cost Benefit Analysis, Phillips P. & J. (2008) came to the conclusion that ROI is considered to be a more balanced approach to calculate the impact of a programme although both methods use similar measures. Both ROI and CBA can be used to have a “holistic” view of the results of the evaluation target.
The barriers towards the application of the ROI process comprise mainly the lack of time, skill and funding. ROI evaluation will involve some cost, but this cost is not so excessive and is easily overwhelmed by the benefits that can arise from the evaluation process. Moreover, as part of the evaluation planning, ROI process demands deep understanding and excellent guidance from the managers so everyone that is involved in the evaluation process can apply the methodology in the boundaries of his responsibilities without interfering or overlapping the evaluation part of another actor. In addition to the excellent evaluation planning that is needed, there should be a good needs assessment from the organization so that the evaluation targets can be more accurately defined. Finally, the fear of the failure of the evaluation or the fear for the outcomes of the evaluation process should be overcome. Except from these real barriers, there are also some barriers that can arise from wrong impressions and myths around ROI. According to Phillips P. & J. (2008), there are myths that present ROI as a very complex and expensive process that can consume many critical resources or that ROI is a passing fad that reflects only past performance. It is true that ROI methodology can become very expensive and consume many critical resources, but only if it is not properly planned, controlled, and organized. In general according also to Phillips P. & J. (2008) and Philips (1994, Vol. 1), ROI methodology is based on a simple formula and the process guides analysts step by step and it can easily be replicated since it is a systematic process. Moreover, the continuously increasing need for accountability and cost-benefit measures and its own flexibility make ROI a powerful tool that can be used to forecast also value in the future. Endogmus et al. (2004) state that despite the fact that ROI calculation can produce a useful and credible performance measure, by comparing costs and benefits and by estimating the ratio of this analogy, this calculation is unable to take into consideration the time and risk factors that are crucial for a correct evaluation result and a useful economic analysis. As in the case of Cost Benefit Analysis, the time parameter can be taken into consideration by using discounting and net present value, while risk can be successful in treated through comprehensive project level risk management. In addition to the above, Stone (2005) proposes that sensitivity analysis and cost-effectiveness acceptability curves can be used to determine to what degree uncertainty influences the results of the economic evaluation process. Hajdasinski (2000) uses also Internal Rate of Return (IRR) and net present value to bring the value of future benefits and past cost into present, so as to achieve a direct comparison. He also states that if the cost of equity, instead of the cost of capital, is used as the cost of an investment both debt and equity then arises a problem. If the return on the total funds invested is greater than the cost of debt, increasing the debt will result in an increase in the return on equity funds invested. So by increasing leverage, the results of the evaluation are tremendously affected and this can result in misleading decisions. Finally, Philips (2003) pinpoints the fact that measuring ROI is a topic that has caused many debates among researchers and practitioners, analysts and decision makers, making some to consider ROI measurement as flawed, while other considering ROI measurement as an answer to accountability needs. It is believed that only through the deeper understanding of the benefits and disadvantages of ROI, this approach will strengthen its credibility and become a valuable tool, not only in the hands of researchers and analysts but also in the hands of managers and decision makers. Download 1.95 Mb. Share with your friends:
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