Calculating an ROI From Healthcare

There are two indisputable facts about employee benefits: Workers want them, and employers spend a considerable amount of money to provide them.

According to MetLife’s 16th Annual Employee Benefit Trends Study, employees not only value their benefits, but 83 percent of them would even take a small pay cut (average of 3.6 percent) to gain a better selection of benefits.

The U.S. Bureau of Labor Statistics reported in June that employer costs for employee compensation averaged $36.32 per hour worked, and benefit costs averaged $11.55, which accounted for 31.8 percent of total compensation. In the private sector, insurance benefits averaged 8 percent of total compensation costs (with health insurance representing 94 percent of the total insurance costs). Given the dollars involved, it would seem both employers and employees would want a return on the investment made in benefits, although their respective definitions of ROI are probably different.

Castlight–a health-navigation company–recently approached me with a pitch. I rarely consider writing about specific products, but its story grabbed my attention because it wanted to discuss its return-on-investment guarantee.

I must disclose at this point that whenever a vendor wants to discuss ROI, I move to full-stage alert on the skepticism scale. I spent a good portion of my career working in and around health, wellness and wellbeing programs. My time in that space allowed me to be involved in the early stages of the health and productivity/performance-management movement. I frequently watched in horror as people bent mathematical equations into obtuse angles just to produce ROI for employers and benefits consultants.

Sometimes these same vendors were painted into unfair corners to produce results that often relied as much on the employers’ and employees’ behaviors and commitments as their products and services. Nevertheless, I believe that fuzzy math created a black cloud over the industry.

In the beginning, the wellness industry pitched common sense as the reason why its programs would make a difference in managing, containing and even decreasing healthcare costs–and at first blush, we were all on board. But as the French Enlightenment writer Voltaire once stated: Common sense is not so common.

Educating employees about topics they already inherently understood–exercise, nutrition, body weight, and tobacco and alcohol use–didn’t change their behaviors or employers’ expenses in a statistically significant (or long-term) way. This fact, coupled with workers regularly changing companies, led employers to conclude that, at a minimum, they might be helping employees become healthier for another employer’s benefit.

It was under this prejudice that I entered into a conversation with Castlight’s Pierce Graham-Jones, senior vice president for growth, and Gil Potter, vice president of analytics.

I’ll cut to the end of the story to avoid the suspense: I believe Castlight is using an appropriate process to calculate ROI. The vendor looks at a 12-month runoff of the prior year’s employee-healthcare-claim data and applies industry-standard risk-adjustment models from Verscend Technologies Inc. (a respected healthcare-data-analytics firm) to analyze cost savings. Each person in the model is assigned a risk score, and then users and non-users of Castlight services are compared. ROI is then calculated as total savings divided by the fees paid by the employer to Castlight.

To qualify for the ROI guarantee, an employer must be under a two- or three-year contract, using a pre-identified set of products and services, and be of a certain size.

Castlight does not publicly share the size of its customer base or the number of employers that participated in the first-year ROI analysis. However, the vast majority of its customers in the initial analysis reportedly achieved a positive return.

My conversation with Castlight customer Eric Record, the wellbeing and benefits leader at Steel Dynamics, added several noteworthy points to the ROI discussion. Record shared that he considers ROI whenever he believes he can receive a valid measure. The steel producer and metal recycler achieved a 1.5-percent reduction in medical costs (or healthcare spend) when implementing the Castlight product. Record believes that the percentage is less important than the significance of being able to receive a credible measure of savings versus investment.

Part of what was behind Steel Dynamics’ success was high registration and utilization of the health-navigation platform. Eighty-six percent of benefit-eligible employees enrolled in the Castlight services, and half of them use the system on a regular basis.

Record found that the company’s positive ROI was driven by employees and their adult dependents choosing lower-cost vendors for medical services such as office visits, high-tech imaging and selecting services performed on an outpatient versus inpatient basis.

Part of Steel Dynamics’ success in managing healthcare costs is related to an overall approach that is worth noting and reviewing. It begins with a company culture in which employees are mindful of the costs associated with healthcare and recognize that every dollar saved benefits everyone.

Its success is also dependent upon senior-leadership support, including throughout the company’s 80 locations. A report is shared with each division on program utilization. Leaders can compare their success with similar businesses at different locations and rarely appreciate seeing their names on the bottom of the list. They will communicate with their employees about the benefits of the program in a visible way.

Finally, during the initial year of using Castlight’s products and services, the company employed raffle-related incentives to encourage enrollment. Once employees accessed the platform, however, incentives were no longer needed because of employee satisfaction with the services.

As the quality of data collection improves and actuarial-based algorithms continue to develop and work their way into the mainstream, return on investment calculations will become more meaningful. Until then, it is important for human resource executives to carefully weigh–and agree upon–ROI calculation methodologies with their vendors. And, when ROI is difficult to measure, choose benefits based upon a balance of doing the right thing for employees and the company culture.

Carol Harnett
Carol Harnett is HRE’s Benefits columnist. She is a widely respected consultant, speaker, writer and trendspotter in the fields of employee benefits, health and productivity management, health and performance innovation, and value-based health. Follow her on Twitter via @carolharnett and on her video blog, The Work.Love.Play.Daily. She can be emailed at