ROI Challenges with PEPM Models
The old line that an ounce of prevention equals a pound of cure is common in health care. Lowering blood pressure is cheaper than a stent for a heart attack. Losing weight is cheaper than a spinal fusion for low back pain. But it is also quite complicated. When healthcare is measured in human lifetimes, how do you know that your intervention saved a costly, unnecessary episode? Or was it something else?
It is common to ask for Return on Investment (ROI) calculations when purchasing healthcare services. The intent is to show a positive ROI, of course, in particular because employers or payers are investing limited healthcare dollars for their entire population and would like a return. The challenge with calculating ROI, however, is that there are many (bad) ways to do it and plenty of opportunities to massage numbers. Those trying to sort this out should take comfort, however, that a few principles can predict whether something is/ is not likely to be ROI positive.
For instance, one standard practice in purchasing benefits - Per Employee Per Month pricing - makes achieving a positive ROI hard.
What is Per Employee Per Month (PEPM) pricing? In the health and wellness world, most vendors sell platforms designed to help employees prevent downstream healthcare costs. They charge by calculating a per employee per month fee (e.g., $1.50 PEPM).
Why PEPM models make positive ROI hard. While each vendor can use their own methods for calculating ROI, four factors make achieving positive ROI hard:
- PEPM models encourage vendors to do less work - PEPM models are sort of like an all you can eat buffet. It’s when people don’t eat the good stuff that restaurant make money. The same pressure applies with PEPM models.
- Employers must drive engagement - Engaging individuals to do anything is hard. Just as PEPM models encourage vendors to do less work, they also encourage vendors to care less about engagement. This shifts the hard task to employers.
- Limited choice - A tendency with PEPM vendors is to position themselves as a platform for all employees. Because companies want to limit complexity, they will often settle for one platform. Since individuals prefer some choice, this further limits engagement.
- Encouraging set up fees - Lastly, PEPM models are complex. Who is an employee? When? Etc. Where there is complexity, there is an opening for fees. These fees are real, and when ROI is already hard to achieve, this can further weigh down positive ROI.
What can employers do? Pay differently - There are alternatives. Companies can pay lower PEPM fees and tie more dollars to validated outcomes. Companies can also pay per use, shifting pressure back to vendors. For more options (and a good read in general) check out Tom Emerick’s and Al Lewis’ well-written book on the topic here.
At Pack Health, we combine a low cost pay-per-use model with regular reporting on validated outcomes. We also happily act as partners with clients to help think through what some strategies to improve ROI are. We are happy to show you how.