Is the online fitness programming as cost-effective as the weight management module? When will the new personal coaching program reach a favorable break-even point? Are regular fitness center participants really less likely to incur high medical care costs? Is the injury rehabilitation program generating a favorable benefit-to-cost ratio? When the programming budget tightens, which programs should we keep, put on hold, or eliminate?
Do any of these questions sound familiar? As cost-justification demands increase in many health/fitness settings, more decision makers are turning to various econometric tools and techniques to direct their strategic planning efforts. Perhaps the most popular and user friendly econometric techniques found in health and fitness settings include break-even analysis (BEA), cost-effectiveness analysis (CEA), and benefit-cost analysis (BCA) (1–11).
The purpose of this article is threefold: to familiarize health and fitness professionals with basic econometric frameworks, to describe the criteria for selecting a particular econometric tool, and to explain a step-by-step process for preparing and conducting each of the respective evaluations.
Determining which econometric evaluation can best meet your evaluation needs depends on many factors, such as
- what types of programs and/or activities you want to evaluate
- how much time you have available to gather, review, and analyze appropriate data
- the time frame of your evaluation timetable, for example, short-term, intermediate, long-term
- the types of tangible cost-and-benefit variables that are readily available
- your resources, for example, personnel, equipment, a comparison group, and so on.
ECONOMETRICS: THE APPLICATION OF STATISTICAL METHODS TO THE STUDY OF ECONOMIC DATA AND PROBLEMS
When assessing each of the preceding factors in your particular setting, consider whether they collectively provide a suitable platform for a particular econometric evaluation (Table 1).
BEA offers decision makers a measurement tool to determine if a specific intervention is on the right track. As the age of fiscal scrutiny intensifies, program directors need to know the financial cost and impact of their programs and services. As new programs are considered, well-informed decisions can be made only after conducting an objective assessment of one’s efforts. Certainly not all programs and services are established to generate a direct profit; nonetheless, decision makers should understand where the break-even point is and what the contributing factors are.
Many tools are available for determining the financial success or liability of a facility or specific program, but arguably, none are more powerful than BEA. Sometimes referred to as “cost-volume-profit analysis” or “contribution analysis,” BEA can generate a break-even point to show when both benefits and costs are of equal value. Of course, when benefits exceed costs, a positive return on investment (ROI) has been achieved.
Conducting a Break-Even Analysis
The first step in conducting a BEA is to identify and calculate the monetary value of all cost items. A simple expense record is a good way to list and track these costs (Table 2).
The second step is to add fixed and variable costs to calculate total costs. The third step actually involves two substeps: (a) determine a baseline so you will know when to project future costs and benefits and (b) identify and define what type of benefit variable can be realistically quantified and compared against total costs. Naturally, the benefit variable should reflect one or more of the primary goals associated with your intervention. For example, suppose the main goals of your low-back injury prevention program are to (a) reduce the number of low-back injuries and (b) reduce the average cost of low-back injuries. Because BEA involves some degree of forecasting, it is important to establish a valid baseline or reference point on which to base your projections. First, you need to review low-back injuries and costs during the past several years to develop a good baseline. By and large, reviewing several years of retrospective (past) data (a) may reveal an upward or a downward trend while (b) providing consecutive intervals of data that you can use to determine an appropriate baseline. Generally, when you have several years of retrospective data that show (a) a year-to-year downward trend, (b) no year-to-year change, or (c) a year-to-year upward trend, it is acceptable to use the last year’s performance as the baseline. For example:
However, it is common to see year-to-year data mimic a “roller coaster” phenomenon — going up and down in a chaotic order. If so, there are several acceptable options to consider in selecting a baseline. For example:
- Sum all yearly data and divide by the number of years to calculate a yearly average.
- Eliminate the highest and lowest numbers and average the remaining numbers.
- Sum the highest and lowest only and divide by 2 to calculate an average.
The fourth step is to calculate current and projected benefits (in dollars) based on any cost reduction. The fifth step is to calculate and illustrate all cost-saving benefits to determine if, and when, a break-even point will be achieved based on the initial impact. Let’s assume that your low-back injury prevention programming costs alone are approximately $25,000 for year 1 and then $20,000 each for years 2, 3, and 4. And let’s assume that you expect a cost savings of approximately $20,000 in the first year and then $25,000 each for years 2, 3, and 4. Thus, your comparative costs versus benefits would be:
At the preceding cost intervals, it would take about 2 years to achieve a break-even point, as shown in Figure 1.
The preceding steps serve as the methodical basis for preparing a BEA. However, they don’t address possible “what if” scenarios that may be of interest to program planners. For example, what level of participation is needed to achieve a break-even point? And what impact is sufficient to bring benefits at par with costs? This is where a technique known as “impact threshold” can be of great value.
How many at-risk employees does your intervention have to reach and impact to pay for itself? That primarily depends on three factors:
- cost of your intervention
- individual (unit) cost of the targeted risk factor, health claim, and so on
- number of participants who successfully achieve the intervention goal
An impact threshold factors in each of these influences and can indicate what level of impact and effectiveness your intervention needs to achieve to break even. For example, suppose you plan to spend $30,000 of your budget on interventions to reduce the number of at-risk employees with a specific risk factor, and the targeted risk factor cost is $500 per at-risk employee. Based on this scenario, an impact threshold — sometimes referred as number needed to treat (NNT) — can be conducted to show that the program would need to impact at least 60 at-risk individuals for the cost savings (benefit) to equal/offset the intervention cost (Figure 2).
A measure of the COST of an intervention relative to its impact, usually expressed in DOLLARS PER UNIT of EFFECT.
What if you want to compare one program with another program to determine which one produces the greatest benefit for the least expense? The CEA can answer that question. Instead of assigning monetary values to a single intervention outcome (as is done in BCA), the CEA only compares the costs of alternate interventions for achieving a specific outcome.
Simply put, a cost-effective intervention is one that achieves a health objective at less cost than alternative interventions. For example, if you wanted to determine which of two health coaching interventions is the most cost-effective, you could do so with the following CEA framework:
Considering the preceding results, you could conclude that the single-coach approach was less costly to offer and three times more economical (one third as costly to produce a positive outcome) than the team-coaching approach.
Conducting a Cost-Effectiveness Analysis
Let’s use the following example to illustrate a step-by-step approach for designing and implementing a CEA:
- 1. Determine program goals and objectives. What is your intervention supposed to do for employees and/or the organization? For example, your low-back injury prevention program is designed and implemented to reduce the number of back injuries (goal) by increasing abdominal strength and low-back flexibility (objective 1) and encouraging the use of proper lifting techniques (objective 2).
- 2. Calculate total intervention costs. Consider easily quantifiable cost items such as personnel, facilities, equipment, marketing, incentives, and so on.
- 3. Determine the outcome/impact of each program intervention. Compare the outcomes of all interventions. For example, two interventions are provided to reduce the risk of low-back injuries (Table 3).
- 4. Compare intervention outcomes and determine which is most cost-effective. For example, although the group seminar intervention initially costs five times more than the daily prework stretching intervention, prework stretching was far more cost-effective ($60 vs. $135).
The primary purpose of BCA is to determine whether a program is worth its cost. The BCA is an economic tool with an emphasis on estimating the monetary value of everything. The BCA is appropriate when both benefits and costs can be tangibly measured in monetary terms. For example, consider a hypertension screening program that generated cost savings of $50,000 via reduced hypertension-related absenteeism and hypertension-related health care costs compared with an annual intervention cost of $20,000. Thus, a preliminary benefit-to-cost ratio of 5 to 2 would apply, resulting in a net ratio of $2.50 to $1:
Of course, the preceding ratio can be compared with that of another program if evaluators wanted to determine which of the two programs is most cost-effective. For example, suppose the preceding program’s benefit-to-cost ratio is compared with that of a prework stretching program that yields the following ratio:
Although both programs are successful, the prework stretching program produced a better benefit-to-cost ratio and, from an economic viewpoint, is as important to the organization’s health as the more expensive hypertension screening program.
Performing a Benefit-Cost Analysis
The cost side of a BCA consists of costing all of the tangible planning and implementation resources. In contrast, the benefit side of the equation consists of calculating the monetary value of any positive outcomes. Some common benefits that exist in many health/fitness settings include increased membership sales, increased profits, lower exercise-induced injury costs, fewer equipment breakdowns, and lower health care costs. In contrast, typical cost items include personnel costs (wages and benefits), facilities, utilities, screening procedures, and equipment.
Theoretically, calculating “direct” benefits associated with an intervention should be relatively simple. However, before any benefit can be calculated, evaluators must select benefit variables that are accessible and measurable and attributed, to some extent, to the intervention. After all costs and benefits have been identified and measured, the two categories are compared monetarily. If the value of the benefits minus the value of the costs is positive, then the analysis would indicate that the intervention is financially “worth the effort.”
A simple way to determine the net benefit of a single intervention — or multiple interventions — is illustrated in Table 4. Using several “performance indicators” to reflect possible cost savings, this example renders a BCA ratio based on exercising programming costs versus reduced disability costs in a worksite setting.
As health/fitness practitioners face greater pressure to demonstrate that their programs are effective, there are several econometric tools that can assist them in measuring the reach and impact of their efforts. Tools such as the BEA can indicate front-end prescriptive and midway intermediate feedback on program-specific impacts. In addition, supplementary tools such as CEA and BCA can reveal comparative and outcome financial results that practitioners can use in various phases of strategic planning.
CONDENSED VERSION AND BOTTOM LINE
In today’s cost-conscious, performance-focused marketplace, bottom line financial impacts are essential for budgeting support. In all types of venues, health/fitness practitioners should consider using appropriate econometric tools to evaluate the overall quality and impact of their strategic programming efforts.