*What is the Financial Model and Conceptual Approach to Convert Wellbeing Programs into Investments: A Case Study.*

When I was first presented with the challenge of having to convert expenditures on a wellbeing program into an investment, including the commonly used measures of profitability, such as Internal Rate of Return and Net Present Value, I felt a bit lost.

After all, I came from the financial and economic forecasting field, not the HR or health care fields. **I began by applying the same methodology utilized by other departments to obtain budget approval** and then overcame the obstacles as they occurred.

So let´s do so now with an example. I’ll **start by describing the approach and ROI calculation required to obtain approval to open a new factory**, then I’ll **apply the same logic to a wellbeing program.**

Let´s say that my goal is to **obtain approval to construct a new factory** to produce and sell a widget. I start by **calculating all the fixed and variable costs I will incur**, such as the upfront land and machinery acquisition costs, and the ongoing labor, utilities, marketing, and sales costs each year.

Starting in perhaps the second year, I **would sell my widgets and generate revenues**. The revenue forecast would be based on market research, consideration of competitive widgets, and the price at which we would start selling the widgets.

**During the first few years, I’d expect a loss** (the outflows would exceed the inflows), and then eventually the inflows would start exceeding the outflows. In this case, I would **select a period of time over which I would calculate these cash flows**, say 5 years.

Furthermore, I would add up the net cash flows each year over the five years, and **then hope that the net amount would be positive**.

In addition, I’d **divide this net cash flow by the initial investment** (the cost of land and machinery) to **obtain something called the Internal Rate of Return** (IRR) or compare the initial investment with the net cash flow to obtain something called the Net Present Value.

Note that I do not do this calculation by hand, as there are functions in Excel called IRR and NPV that do this for me. To clarify, the **reason I use them is that the IRR and NPV formulas consider that my Treasurer could have invested the money he would approve for the factory in something quite safe**, like Treasury bills, so I am penalized a bit for that.

I would then hope that my IRR and NPV look quite attractive, as compared to investment requests being presented by other departments.

Now let´s **apply this methodology to a wellbeing program**, say an investment in a corporate gym, and see what obstacles we face. Let´s envision a gym: there are aerobic machines, such as treadmills, stationary bikes, and Stairmasters.

They make us breathe hard and are primarily focused on improving cardiovascular health to prevent CHD and Diabetes. Then there is the weightlifting equipment, which strengthens our muscles and is good for avoiding muscular-skeletal conditions, and finally, there are the Yoga classes in the back room that are good for reducing stress.

Calculating the initial investment is not so hard: I **calculate the cost of the equipment, space, construction, etc**. Consequently, this results in my Initial Investment. Let´s say that this cost is $750,000.

Now let´s try to calculate the cost savings to the employer and overcome obstacles as they occur. I **need two items**: the **number of employees would come down with these conditions** (the equivalent of the number of widgets sold by the factory above), and **what would be the cost to the employer if this happened** (the equivalent of the price I would charge for each widget).

My first challenge is how do I measure the reductions in CHD, Diabetes, Muscular Skeletal Injuries, and Stress, and then convert these reductions into financial terms (i.e., money)?

For CHD, I was quite lost, so I approached a professor at Harvard Medical School who suggested that I **use something called the Framingham Model**. This Model quantifies the probability of a CHD event over 10 years for one person, based on the person´s risk factors, such as blood pressure, smoking, diabetes status, cholesterol, age, gender, etc.

I started using the Framingham Model to **obtain a forecast of the incidence of employees that will develop CHD** but discovered that I had to make several adjustments to expand its use from one person to a larger population.

Next, I needed to **develop an assumption about the percent breakdown of the employees** that are considered to be Very High Risk, High Risk, Moderate Risk, Low Risk, and Very Low Risk, **based on risk factors**.

I **found epidemiological statistics that have these data** (or you can also use data from a Health Risk Assessment). Inputting the employee population with my risk factor breakdown into my modified Framingham Model, I could then **estimate the expected prevalence rate of CHD among the employees** (we will call this the “Incidence Pre-Program”).

Let´s say that **the result is that 5 employees would have CHD over the next 10 years**. The next question is what is the cost to the employer of these 5 cases in lost productivity, turnover, and disability? We would then **apply the calculation algorithms** described in previous blogs to estimate the cost. Let´s say that the cost of the 5 cases is $950,000.

Now let´s make some assumptions about the effectiveness of the cardiovascular program within the gym. Since we cannot turn the gym into a clinic, **the gym staff will be instructed to measure the reduction of a single risk factor**, say blood pressure (I have been to gyms that do this).

We then **re-enter the Framingham Model and re-run it with this single improvement in blood pressure among the persons in the gym**. Let´s say that, based on this improvement, instead of 5 CHD cases, there will be 3 cases (we call this “Incidence Post Program”).

We then **recalculate the costs**. Now let´s say that this results in a post-program cost of $750,000. We then subtract the post-program cost from the pre-program cost **and obtain a savings of $200,000**.

Not too shabby, considering that we only considered the reduction in blood pressure and not the reductions of other risk factors.

But wait! we are not done, as **we must now calculate the cost savings from a reduction of muscular-skeletal conditions from the weight program**. With this in mind, there are epidemiological databases that provide statistics on the prevalence of muscular-skeletal injuries within employers.

There are also studies on the effectiveness of a weight strengthening program. Utilizing these data, as well as the formulas presented in previous blogs, let´s say that the savings from a reduction of muscular-skeletal conditions are $150,000.

Finally, **we then follow a similar approach to derive the savings from reducing stress from the Yoga program** and obtain an additional savings of say, $170,000. Voilà! the total cost savings from the gym is $520,000.

As a **final step, we divide the $520,000 by the initial investment of $950,000, and obtain an Internal Rate of Return of approximately 55%!** Simple as that, that’s how we convert wellbeing programs into investments.

Of course**, I over-simplified the above steps**, but you get the picture. Our WELLCAST ROI Calculator has built-in most of the defaults you need (we have conducted the literature searches for you). It also considers the opportunity cost of money, the fact that CHD improvements take longer to occur than muscular-skeletal and stress improvements, and the fact that there are ongoing costs within the gym, such as electric bills, staff costs, etc.

The point is, that **it is possible to calculate the ROI of wellness programs in much the same way as any other investment**. But how does one present all of this? This will be the topic of the next blog.

If you find my blogs informative, please invite other benefits, HR, medical directors, procurement, and financial administrators to read my blogs or visit our website, www.wellcastroi.com.

Louis A. Servizio it's the President and Founder of the Disease Management Strategy Group Inc. and has more than 25 years of experience in converting benefits into investments, strategic planning and preemptive programs. He graduated from the College of the Holy Cross, majoring in Mathematics, and completed a Master of Science degree specializing in finance at MIT.
In 1991, Servizio developed Wellcast ROI™, an analytical tool that predicts the financial return rates of programs and interventions that reduce physical and behavioral diseases. The software is internationally utilized, with localizations for each specific country.
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