HFMA VIEWS

Scott MacStravic, PhD

Neither the concept of “return on customer” nor “return on employee” seem to have been discussed very much relative to healthcare organizations. It is clear, however, that many if not most HCOs have at least considered the advantages, even necessity of going for more profitable customers, as covering the costs of un- and under-insured patients becomes increasingly difficult under the miserly payments available from commercial and government insurance programs.

But return on employee is an uncommon term even in business at large, much less health care. A Google search turned up only one example of this specific phrase and initials ROE being used. And it dealt with “return” only in the narrow context of revenue per employee, rather than on elements of employee contributions over which employees truly exert control. On the other hand, the phrase “employee value” does yield a large number of references, so at least the idea is not unknown.

ROE is simply a financial expression of employee value, based on either the overall investment that employers make in hiring, managing, developing, retaining, and rewarding employees or a specific investment intended to increase the value of employees’ contribution to the performance of the organization. At the overall level, there have been some interesting findings with respect to how much employees are worth, compared to how much they cost organizations.

For example, one analyst suggested that on average, roughly 10% of employees are negative contributors, with another 15% marginal. Half of employees are at least positive, though hardly outstanding contributors, while 15% are high performers and 19% real “stars”. [J. Durel “Measuring the Employee’s Value to Your Organization” Qm2.org (undated, downloaded Jan 2, 2007)] Most employers, while claiming that their employees are their most valuable asset do little or nothing to measure just how valuable they are, perhaps for fear that employees will start thinking in the same terms and feel they are underpaid. [R. Aldag & W. Reschke “Employee Value Added: Measuring Discretionary Effort and Its Value to the Organization” Center For Organizational Effectiveness, Inc. 1997]
On the other hand, at least one analyst has calculated specific dollar value for employees in the high-tech, high-knowledge pharmaceutical industry. [P. Strassmann “How Much Is an Employee Worth?” Microsoft.com Jan 14, 2006] The analysis used is based on comparing the “Knowledge Value” compared to “Financial Value” of firms, and comparing this to the total compensation given to employees, adjusted for the capital costs of the firms, since their facility and equipment capital investments contribute significantly to output quantity quality, in addition to human capital investments.

The analysis examined seven different pharmaceutical firms, and calculated the “net worth” or dollar difference between the value firms gained from their employees and compensation paid. This represents the ROI amount or “net profit” per employee, in terms of the firm’s investment therein. The amounts for the seven firms ranged from a high of $538,000 per employee at GlaxoSmithKline to a low of $2,656 at Novartis, with Wyeth $412,000, Johnson & Johnson $182,000, Atrazeneca $76,000, Roche $44,000, and Novo Nordisk $40,000. The analysis concluded that firms with low net worth per employee signal a fundamental weakness, while those with high net worth may be at risk for employee raiding by their rivals.

The ROI ratios for these seven firms, a ratio often used to judge the relative effectiveness of investment management, ranged from a high of $7.78:1 for Wyeth to a low of $1.03:1 for Novartis, with the mean ratio $3.34:1 for all seven, though only three of them were as great as$2:1, with the average being skewed by two firms at $7.78 and $6.96. In any case, these ratios demonstrate rather extreme variation in ROE, however it is calculated.

When examining the importance and value of improving employee health, using only productivity as a measure of value, another analyst used a ratio of $2.00:1 to show how a modest investment in improving or protecting employee health needs only a tiny improvement in productivity, only 0.33% in the illustration used, to make up for the investment and achieve at least a breakeven return. [M. O’Donnell “Health and Productivity Management” American Journal of Health Promotion 14:4 Mar/Apr 2000 215-217]

The Dow Chemical Co. has calculated that it needs only an average productivity improvement of 0.17%, only half what the above example calculated, to break even on its wellness investment, not counting the other predictable returns through reduced sickness care, disability and workers compensation costs. [R. Goetzel, et al. “Estimating the Return-on-Investment from Changes in Health Risks on the Dow Chemical Company’s Health Care Costs” JOEM 47:8 Aug 2005 759-768]

If HCOs are to truly operate on the principle that their employees are their most valuable asset, they must at least attempt to determine just how valuable they are. Moreover, it makes sense to calculate the different value of different employees in order to focus attention and investment where it will do the most good, in employee health, development, and retention. One employer achieved an immediate 44% improvement in ROE by switching to a pay-for-performance compensation model from an hourly wage one. Another gained a 35% increase in productivity, along with a dramatic reduction in employee stress and turnover, by adopting a “work anytime anywhere” policy.

While HCOs understandably have focused much of their attention on information technology investments, along with the capital investments required to keep up with state-of-the-art quality of care, they should not overlook the importance and value of investing in employees. It is likely that their overall financial and balanced scorecard performance can be improved significantly by working explicitly to improve their ROE ratios and amounts, where there is likely to be great room for improvement.

Editor's note: This in Scott MacStravic's 500th published piece. Congratulations, Scott! The healthcare field is better for your contributions.