BetterCare Insurance Company is considering the development of a case management program for its insured diabetics. BetterCare has estimated that the case management program will cost $200,000 in development and start-up costs. Once the program is operational, BetterCare estimates that the program will reduce utilization, and therefore claims payments, for its diabetic population. Net cash flows, calculated as claims-related savings less program operational costs, are estimated to be as follows:
Years 1 - 5 ($25,000) per year cash outflow as the program is ramping up
Years 6 - 10 $75,000 per year cash inflow as the program starts generating better outcomes
a. Assuming BetterCare's corporate cost of capital is 15%, on purely financial grounds, should BetterCare invest in the program?
b. Now, assume the program is able to generate positive outcomes sooner. If the expected cash flows were as follows, would your answer change?
Years 1-2 ($25,000) per year cash outflow as the program is ramping up
Years 3-10 $75,000 per year cash inflow as the program starts generating better outcomes