Return on Investment (ROI) calculator
What is it and how can it help me?
This tool calculates the return on investment (ROI) of a quality improvement initiative using the financial benefits and costs data you insert from your project.
When does it work best?
Used correctly, the 
ROI Calculator v5r.xls (165.50 KB)can be used at the start of a project to provide an estimate of the costs for upfront justification and again towards the end of a project as a measure for the success of the improvement project (not only by confirming initial costing validity but also by validating any ongoing project maintenance and sustainability costs). Indeed, ROI can be used throughout the life of a project to continually see if benefits are being realised and make decisions about whether to continue, modify, amplify or terminate a project.
How to use it
This tool provides an overview of return on investment, including examples of financial benefits and costs. The formula for calculating return on investment is:
Benefits – Costs = Dividends
Return on investment can also be provided as a % figure, showing the savings as a percentage of the total costs:
Benefits – Costs x 100
Costs
While ROI is usually thought of as being purely about “financial” benefits, it is helpful to start by thinking about the quality benefits of investments. Many seemingly ‘non-financial benefits already have a financial element (for example, reducing patient safety incidents often results in lower length of stay and/or less intensive treatment and improving the patient experience results in a financial benefit through the payment system described in the Operating Framework for 2010) . Though calculations of ROI only use benefits that can be expressed financially, it is important that all benefits are captured and recorded.
Using a robust approach to ROI will remove the need for reactive evidence gathering by consistently developing a clear evidence base on which to build the business case for improvement.
Identifying the costs of patient care
Estimating what patient care will cost to provide before and after an improvement initiative provides data for the benefits element of the return on investment formula. Four key categories of operating costs appear on a finance director’s contribution statement:
• Staff costs (e.g. employee expenses, training, courses and conferences)
• Occupancy costs (e.g. establishment and premises)
• Drug costs
• Clinical negligence and legal fees
There will be both fixed and variable elements in each of these categories. Your improvement work, at least in the early phases, is likely to impact upon the variable costs.
Use these categories of costs to keep it simple and relevant to the financial outcomes recognised by your finance staff.
Commissioners currently use nationally agreed tariffs to identify the costs of patient care to them. Payment by Results (PbR) is a system in which primary care trusts pay hospitals for the number and complexity of patients treated, using a price list (the national tariff) for all activity within the scope of PbR. This type of arrangement is known internationally as 'casemix' funding.
In simple terms, the tariff is based on the average cost of services reported by NHS providers through the annual reference costs collection. Healthcare Resource Groups (HRGs) are the unit of payment, or 'currency', for the tariff. HRGs are clinically meaningful groups of diagnoses and procedures that consume similar levels of NHS resources.
The tariff is the minimum a provider receives, because the PCT also applies a nationally determined market forces factor (MFF) adjustment to reflect the fact that it is more expensive to provide services in some parts of the country than in others. Reducing tariff payments made by PCTs to acute trusts by moving care out of hospital and into the community is a key improvement objective for primary care trusts.
The business case for improvement within a commissioning body should therefore show that the financial benefits to be made from the reduction in tariff payments outweigh the costs of providing the service in the community. Commissioners will also incur staff costs if they are funding the improvement initiative. In many cases, however, improvement initiatives are jointly funded by PCTs and acute trusts.
Some questions in the ROI spreadsheet help you to think about what kind of financial benefits your improvement project may demonstrate. Here are some examples of how to calculate the annual financial benefits for the ROI spreadsheet:
What are the costs of adverse incidents (drugs/infection)?
For example, Trust C reduced the rates of Staph. Aureus and MRSA Bacteraemia infections in patients with end-stage renal failure by 25% over the course of six months. This projects to £220,020 over the course of one year (103 Staph. Aureus infections were projected over the coming year based on previous performance at a cost of £6,000 per infection and 32 MRSA infections at a cost of £8,190 per infection).
What staff cost does the health organisation save (reduced staff sickness/absence/turnover and time)?
For example, saving nurse time within Trust A through the implementation of Productive Ward released £5,000 in bank/agency (variable) staff costs over the course of one month. This projects to £60,000 over the course of one year.
What are the costs of higher length of stay or excess bed days?
For example, Trust B reduced length of stay of 20 patients with a secondary diagnosis of diabetes by an average of two days. This projects to £250,000 over the course of one year if only 50% of the total population of these patients (using an estimated number of 500 patients per year with a secondary diagnosis of diabetes in this ward) were to realise the same reduction in length of stay (using £250 cost per bed day).
What are additional costs of re-admitting patients?
For example, Trust D reduces total admissions of patients presenting with fractured neck of femur by 13% over the course of six months by reducing re-admissions by 50%. This projects to £80,948 over the course of the full year (using an average tariff payment of £5,782 per patient as an estimate of the costs and an estimate of 108 patients presenting with fractured neck of femur over the full year).
What are the costs of waiting (outpatient appointments/GP appointments/pain relief)?
For example, Primary Care Trust A reduced the proportion of GP appointments by 75% within two months by implementing guidance in Focus On: Cataracts, which recommends that patients visiting optometrists should be directly referred to hospital eye services by the ophthalmologist rather than via GP. This projects to £25,920 over the course of one year (based on an estimated 1,728 cataracts operations per year, approximately 80% of whom visit an optometrist and then onto a GP, at a cost of £25 per patient).
Costs of unnecessary procedures?
For example, Primary Care Trust B reduced unnecessary MRI scans at one acute trust by 15% through GP education initiatives over the course of four months. This projects to £111,078 over the course of one year (based on an estimated 4,488 MRI scans per year at a cost of £165 per scan).
Cancelled procedures/ did not attends (DNAs)?
For example, GP Practice A reduced DNAs from 20% to 2% in one week by sending reminder texts to patients one hour before their appointments. This projects to £180,000 over the course of one year (based on an estimated 40,000 scheduled appointments over 50 weeks of the year (excluding bank holidays and GP sickness leave/absence) at a cost of £25 per appointment).
What does an improvement initiative cost to implement and sustain?
Estimating what an improvement initiative will cost to implement and sustain provides data for the costs element of the return on investment formula. Some questions in the ROI spreadsheet help you to think about what kind of costs to consider:
What other staff release/commitment costs does the organisation incur?
One band 8a member of trust staff will be required to spend 50% of their time for six months on the project management and implementation of the Think Glucose project at a cost to the trust of £10,000 (this figure includes salary plus National Insurance and pension contributions made by the employer).
What other implementation costs does the organisation incur?
Purchasing external support to implement the Rapid Improvement Programme will cost £28,000.
What other sustainability costs does the organisation incur?
£3,000 per year will be required to cover the cost of additional training and restocking of materials (e.g.re-printing and distribution of posters and leaflets). £1,000 per year will be required for two days band 8a staff time for awareness raising activities.
What is the cost of measuring/monitoring the problem?
For example, Primary Care Trust C invested £10,000 in training two heart failure specialist nurses to monitor prevalence rates, levels of prescribing and referral patterns to hospitals at eight GP practices. They also gathered intelligence through systems such as the Hospital Episodes Statistics database, which enabled them to target GP practices and develop improvement plans. Instead of visiting the hospital, patients are either seen at home or in heart failure clinics in their GP practices. This reduced hospital admissions by 27% at one acute trust. £50,000 will be required to train eight additional heart failure specialist nurses to replicate the work across the remaining 29 GP practices in the region, in order to realise the improvements across the other hospitals funded by the PCT.
Cost of change? (cancelled appointments/increased activity in primary care etc.)
Reduced activity in the secondary sector will result in an increase activity in the primary care sector. An estimated 2,000 additional GP appointments will be required at a cost of £25 per appointment. This results in a total cost of £50,000.
What next?
Practice using the 
ROI Calculator v4r.xls (165.50 KB) (click link to open) using the data from the simple example below.
Background
Think Glucose is an NHS Institute product which aims to improve the care pathway for patients with a secondary diagnosis of diabetes. Key improvement aims are to recognise the condition as soon as patients are admitted to hospital and to enable patients (or their carers) to safely manage the administration and dosage of insulin. The anticipated improvement is that adverse incidents and lengths of stay will be reduced.
Benefits
Use the following information to complete the benefits sheet:
The evidence from the pilot phase shows that the average length of stay before the change was nine days, falling to seven days after the change. There are 500 patients with a secondary diagnosis of diabetes passing through the trust each year. A bed day costs £300. The evidence also shows that there was a reduction in the numbers of adverse incidents, falling from 27 incidents in a six-month period, to 12 in the following six-month period. Over a full year, therefore, it can be estimated that 54 adverse incidents took place before the intervention and 24 took place after the intervention. The average cost of an adverse incident relating to diabetic patients is £210.
There are no benefits to staff. There will be a one-off benefit of £1,000 for the return of unwanted drugs.
Costs
Use the following information to complete the costs sheet:
There are no patient costs.
This improvement initiative will require 0.67 of a Band X nurse to lead the programme over the course of a year. Her annual salary including on-costs is £25,000.
There are maintenance costs of £2,000 per year for the re-printing of posters and leaflets.
There are project implementation costs of £20,000 for external support.
Dividend
Use the following information to complete the dividend sheet:
An improvement of 50% over the first year is projected, 75% for years two and three and 100% for years four and five.
Do you get an annual return on Investment of £115,400 at the end of year one?
Do you get a net present value of £1,040,821?
Reference: www.institute.nhs.uk/thinkglucose
Other useful tools and techniques on this website:
Additional resources
Here are some useful sources of information about the costs of patient care:
1. Costs of adverse events
The Patient Safety First Campaign www.patientsafetyfirst.nhs.uk identified the average costs associated with different categories if adverse incidents in 2009. For example, a central line infection was estimated to cost £8,190 for medicine and staff costs and required an average of two additional bed days.
2. Costs of bed days, admissions and re-admissions
The bed day cost figure most commonly used by health organisations and the Department of Health is currently between £250 and £300 (2009). This estimate includes fixed overhead costs of heating, lighting, laundry and provision of food for the patient occupying the bed, and an average cost for medicines and staff.
An alternative is the excess bed day tariff. Tariff payments will also provide a speciality-specific estimate of the cost of an admission and a re-admission. All of these figures are published in an Excel file on the Department of Health’s “publications policy and guidance page”. However, trusts must be aware that they may incur higher or lower costs than the tariff payment depending on how well streamlined the services are that they provide. In this case, reference costs might be used (see online source below).
3. Costs of waiting
Patients who are waiting less time for treatment will probably require fewer outpatient appointments, fewer trips to their GPs, fewer tests and less time in hospital if test results are made available more quickly. The Audit Commission often publishes papers summarising these costs. Outpatient appointments and follow-up appointments are available in the Excel file on the Department of Health’s “publications policy and guidance page”.
4. Opportunity cost
This is the value of benefits forgone by using resources to provide alternative products or services. For example, the value of a nurse’s time engaged in work outside of primary job duties, the value of resources spent on an unnecessary lab test.
Opportunity costs are also not restricted only to monetary costs. For example, if a new improved health service requires patients to walk further than they did before the change, their lost time and convenience should also be considered opportunity costs although it might be difficult to quantify financially. Assessing opportunity costs is fundamental to assessing the true cost of any change.
5. Other sources of costs information
• National Audits e.g. the National Diabetes Audit
• Hospital Episodes Statistics database: Tariff payments made to Trusts are available via the HES database. NHS analysts within Trusts also have access to this database.
• The Information Centre
• The Audit Commission
• The Care Quality Commission
• Reference costs database (DVDs containing reference costs by year can be ordered from DH online. Enter 'reference costs' into the search box on the top right of the page.)
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