“Investment" means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. (Mahnaz, 2008)
So a “Return On Investment” measures the gain that is being earned on capital invested in a business, it is used for capital budgeting. Return On Investment can be used to compare multiple investments as well, hence Return On Investment (R.O.I.) is a relative measure. Its calculation is Cost subtracted from Invested Amount equals Controllable Profit, which is then divided by Invested Amount and multiplied by one hundred equals R.O.I. ratio. This can be further split into secondary ratios for more detailed analysis, that is: profit margin and asset turn-over.
As with organizations in most industries, investment is precedent to getting it off the ground, its continued run and expected profitabilit/viability. This is not always true in the healthcare industry, it is sometimes slighty different in the sense that, in healthcare there are a large number of facility and technology investments that are not made for financial return purpose (Langabeer & Helton, 2015) an example is cancer research investments, though it is worthy to note cancer care yields a high R.O.I.. Also worthy to note that there are Not-For-Profit Healthcare establishments whereby the rules on R.O.I. are different, where words like social R.O.I., patient-centric terminologies like survival et cetra more often than not cloud financial R.O.I.(Asch & , 2016) especially as investors are known as donors because they are not expecting dividends from their investments.
To attain a great R.O.I., healthcare managers need to be able to balance providing quality care to patients, managing staff, managing assets and ensuring reimbursement from payors and private patients alike. Return On Investment of health care systems is analysed based on measurement of time taken in implementations, cost-savings/avoidance over revenue enhancements, creating a bridge between parties involved in care, achievement of healthier employees through work-life balance thereby reducing sick days, reduction in system downtime, the speed of user training et cetra. There are various R.O.I. tools available to today’s healthcare managers for improving efficiency, competitiveness and operational effectiveness (Langabeer & Helton).
Despite the many cogent reasons for a healthcare manager to understand R.O.I. there are issues with it , 1. R.O.I. tries to measure performance in a single figure, but with the complex nature of healthcare, other various performance measures would be required as well. 2. R.O.I. also tries to determine exact controllable profits and investment, which is hard to achieve. (How much of profit and/or investment can really be traced? Definitely not all and not always especially in large organizations.). 3. In R.O.I. calculations, an estimate of the cost of capital is needed but Cost Of Capital can be hard to calculate. 4. If used in a short-term way R.O.I. can over-state short-term results at the expense of long-term performance. 5. R.O.I. results may lead to a faulty result/choice, an example is, a manager with a divisional 15% R.O.I. may opt for an investment of 22% R.O.I. thinking it would increase its average but the bottomline of the 22% R.O.I. maybe way less than percentage projects. 6. Also like most accounting and finance calculations, it is open to manipulation by manager for example, to assure bonus payment.
A healthcare manager should understand that there are methods of calculating R.O.I. that can vary the results, that is; when assets are valued at the net book value in his or her calculation of R.O.I., it inflates the R.O.I. figure, which can encourage one to hold on to “those assets” even when they are outdated. This return on investment result can not be compared to a similar investment that is using a different accounting policy and method of calculating assets, say fair market value or different depreciation policy. Hence knowledge of US ASC 360 and IAS 16 & 40 covering all of the specific requirements applicable to accounting for property, plant and equipment and investment property, would be essential for a healthcare manger in charge of investment decisions, even with this manager should be prepared for whichever method would be required by investors as criteria or guidelines for funding.
In the purchase of equipment that is considered a long term investment, The earnings from said equipment is considered to be its return.
An example of an investment that can be made by a healthcare manager/administrator is the purchase of a Magnetic Resonance Imaging (M.R.I.) machine, this is an equipment for showing detailed images of the organs and tissues inside a patient’s body. It is widely needed and an expensive piece of machinery; though it will yield returns on the long run especially in a high-patient-traffic facility but may be a bad investment in a small facility with low-patient-traffic. Understanding R.O.I., risk, opportunity cost will help the manager make wholesome investment decisions despite the limited number of accounting methodologies available to those in healthcar..
Another form of investment that would require understanding R.O.I.is the calculation of potential R.O.I. in the training of staff, even if this investment shows a positive R.O.I., an example is that a healthcare manager of a Senior Care Giving facility can not afford to invest in training for temporary workers due to the high employees turn over of the sector.
Conclusively, understanding just the return on investment is not enough to make an investment decision, knowing the risk involved helps for comparison so as to allow the manager choose among various investment options (“Investment”, n.d.). Though taking high risk investment, despite the promise of high return is not advisable for healthcare managers as the industry is highly regulated, so what is permissible or norm today may be revised tomorrow hence playing it safe is wise when investing.
Reference
Asch, D., Muller, R.W. & Pauly, M. V., (2016, March 11th). Asymmetric Thinking about Return on Investment
“Investment” (n.d.). Capital Market Authority Journal Pp1-8 Retrieved from https://cma.org.sa/en/Awareness/Publications/booklets/Booklet_1.pdf
Langabeer J. R. II, & Helton (2015). Health Care Operations Management: A System Perspective. 2nd Edition (Pp 220-230) Jones and Bartlett Learning.
Mahnaz, M., (2008). Recent Developments in the Definition of Investment in International Investment Agreements. International Institute for Sustainable Development. Retrieved from https://www.iisd.org/pdf/2008/dci_recent_dev.pdf
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