Sunday, July 20, 2008

Why Are Such High ROIs Possible in Disease Management?

The Disease Management Care Blog appreciates that in the business world, a return on investment of 1-6% is quite respectable. Contrast that with claims of ROIs of 200% percent or range or more (literally doubling the money) in disease management. Is this evidence of the disease management industry’s incredulous and sloppy methodology?

Maybe it's not that simple. Wanting to boil this area of controversy down to it’s simplest terms, the DMCB offers up a non-financial expert's, non-economist’s simplistic 7 point explanation on why such ROIs are possible:

1) Decades of research on worksite wellness programs, which also address chronic disease in addition to prevention, use many of the same approaches in disease management and have demonstrated reductions in claims expense.

2) Advocates of the Medical Home suggest this approach also reduces claims expense. Maybe it does, but much of the literature is based on interventions not dissimilar from the approach used in disease management. Just like worksite wellness, what’s different is the location, not its effectiveness in saving money.

3) Disease management is all about avoidable medical cost in the form of insurance claims. Avoided claims expense in health insurance is distinctly different from top line revenue, which is a function of premiums. Revenue increases are smaller but are easier to discern and are attributable. Measuring what doesn’t happen – such as emergency room visits or hospitalizations - in the flow of a health insurer's claims is subject to unavoidable variations in measurement and interpretation that can favor disease management programs.

4) In health insurance, changes in the top line reflect real dollars being spent for the real service of risk transfer. There are also real dollars being spent for disease management. In contrast, inflated charges for the medical services that comprise claims expense has little to do with their real costs. Comparing the real fees for disease management against the inflated fees for medical services increases the ROI.

5) Claims typically have a non-Gaussian (skewed) distribution and a very wide distribution. While this can cut both ways, a small reduction in high cost outlier claims in a measurement period can favor the ROI significantly.

6) One averted hospitalization can mean (for the sake of argument) $10,000 in claims expense. Disease management may charge $30 per person per month. If there are 100 persons with a chronic illness, that’s $3000/month or $36,000 per year. It's not unreasonable to believe that avoiding 4 or more hospitalizations may well be within reach of an aggressive program.

7) Then there are the competing countries of 'Mediocrestan' vs 'Extremistan.' The DMCB picked up these terms from Nassim Taleb’s book, “The Black Swan,” which examines the growing impact of ‘low probability’ yet ‘high damage” Extremistan events,’ in a Mediocrestan world engineered to operate around an average. Dr. Taleb doesn’t discuss health care very much in his book, but the DMCB thinks clinical medicine is more Extremistan: slight changes in imperfect tests and even less perfect treatment combined with natural patient variation can result in huge unpredictable swings in outcomes. Despite an aura of science, the real art of caring for patients can be somewhat akin to Chaos Theory. Accordingly, the beating of disease management’s butterfly wings may be enough to avert a sufficient number of high cost storms.

1 comment:

Anonymous said...

Nice post!

I just finished "The Black Swan" so I was interested with your take on his categorizations it and medical costs.....