When it comes to your home medical equipment business, do you
want to be a dinosaur or a dynamo?If you chose the latter —
and you likely did if you're intent on staying in the business
— it's time to do some benchmarking to make some critical
assessments and comparisons about your business to be sure you're
on the dynamo track.
If you don't, warn three longtime HME consultants, you could
quickly find out that you're going the way of the stegosaurus.
“The bottom line is that by knowing industry benchmarks,
[HME providers] can see whether they are operating smart and
profitably or if there is room for improvement,” says Jack
Evans, president of Malibu, Calif.-based Global Media
Marketing.
But in an industry where there is a dearth of national
statistics, benchmarks aren't so easy to come by. Evans, along with
Wallace Weeks, founder and president of Melbourne, Fla.-based Weeks
Group, and Bruce Brothis, education services director and senior
consultant for Alternative Billing Solutions, Bloomington, Minn.,
recognized that.
But they also knew that their years of working with providers
— ranging in location from rural to urban and in type from
mom-and-pops to national chains — made them privy to trends
and numbers that could help other providers benchmark their HME
operations.
The three will present their findings at Medtrade in Atlanta
during an Oct. 19 seminar sponsored by HomeCare. From
operations and staffing to profit margin and merchandising,
following is a preview of some key information from the upcoming
session.
Financial/Operational Benchmarking
There are numerous ways to benchmark your company financially,
according to Brothis, including days sales outstanding, denial
rates and even accounts receivable aging averages.
Days Sales Outstanding — “The most efficient
way to benchmark your organization financially against the industry
is to compare your DSO to the national average,” says
Brothis. “What DSO represents is the average amount of time
it takes from when $1 of revenue walks through your front door
until you put that dollar in your pocket.”
The industry average for DSO hovers “around the high
80s,” according to Brothis. The target, however, should be
the mid-40s, he says.
How do you know your DSO? Here's Brothis' formula:
- Obtain company net revenue data for a given time period, such
as a fiscal quarter, six months or one year. Divide this number by
the number of days in the period. This will yield your daily
revenue figure. (Example: Revenue for 1/1/2005 through 6/30/2005 =
$7,525,000; $7,525,000 divided by 181 (the number of days in that
period) = $41,574.59 daily.) - Look at your current net accounts receivable total. (Example:
Net A/R balance on 6/30/2005 = $2,335,000). - Divide your total net A/R by your daily average net revenue.
That figure is your DSO. (Example: $2,335,000 divided by $41,574.59
= 56.17 DSO.)
You could discover that you have triple-digit DSO, and if that's
the case, Brothis says, “it might be time to re-evaluate your
billing department.”
A/R Aging Averages — How many of your aged accounts
receivables are in the “over 120 days” column? If the
figure is more than 10 percent, you should take a look at how
you're managing A/R, according to Brothis. Here are the targets you
should try to hit:
Denial Rates — Denials are commonplace in the HME
industry. In fact, says Brothis, an average of 26 percent of all
claims submitted are denied. That figure changes according to what
the claim is for, he explains. For example, denials for rehab
equipment run about 40 percent, for oxygen about 18 percent, and
for durable medical equipment about 28 percent.
Intake accuracy, documentation, insurance verification and
eligibility all play a role in whether a claim is accepted or
denied, but so do errors made by the four durable medical equipment
regional carriers.
Overall, Brothis says, a Comprehensive Error Rate Testing report
showed about 10.5 percent of all claims were denied or short-paid
by the DMERCs. Here are the results shown by region:
Billing Staff vs. Revenue — Ever wonder how many
billers you need? Brothis suggests that, on average, HME companies
need one biller for every $600,000 in revenue. About 20 percent of
the biller's time should be spent doing data entry, while the other
80 percent should be spent handling receivables. Brothis points
out, however, that the number could differ based on the individual
makeup of the business. And, he says, “both numbers are
directly affected by other duties a biller may have, such as
customer service, retail responsibilities, inventory,
etc.”
Claims Submission Timing — How often you submit
claims depends a lot on your company's size, Brothis says, but you
shouldn't file any fewer than three times a week. Ideally, he says,
you should file daily. That would result in smoother cash flow and
more frequent billing of recurring rentals, he says.
Retail/Marketing Benchmarking
From a retail standpoint, it's tough to find useful benchmarks
by which to compare your retail operation. Medical conditions and
health care needs vary from population to population. Each
community has its own demographics, and even though many HMEs carry
much of the same equipment, seniors and baby boomers may buy
completely different models of the same products.
“We are not selling Big Macs,” Evans says wryly.
Still, he notes there are several standards that can help to
assess where your retail business stands:
Retail Location — Most retail operations are
located in high-traffic areas where about 10,000 cars pass each
day. They average between 2,500 and 3,000 square feet, with
showroom area taking up roughly half that space. And they feature
exterior signage — a wheelchair, scooter or lift chair, for
example — and window displays “that sell 24/7,”
Evans says.
Showrooms — HME showrooms generally average between
1,200 and 1,500 square feet, plus a customer service desk, fitting
rooms, restrooms, back offices and storeroom/warehouse space, Evans
says. In general, most retail operations generate $60,000 to
$80,000 in sales per month during the first year of operation;
$100,000 to $120,000 per month the second year; and $150,000-plus
per month the third year.
“Gross profit margin is “an important indicator of
profitability,” Evans says, noting that the GPM averages 45
percent for profitable HME businesses. And, he adds, such providers
are dependent upon Medicare/Medicaid for only about a third of
their business.
As in the rest of the retail world, Saturdays are the busiest
days, and evening hours generate a great deal of business, too, he
says. “For locations averaging 1,000 transactions per month,
more than half occur during these periods,” Evans notes.
Staffing — If you're a successful HME retailer,
you're likely generating between $1.5 million and $2 million a
year. You have seven staff members, including a manager and
employees for inside sales, outside sales (referral marketing),
customer service, billing, office/register/phone and
warehouse/delivery. The gross sales generated per employee average
$110,000 annually for successful retailers; if you're very
successful, Evans says, that figure tops $140,000 per year.
Advertising and Marketing — Chances are, you
advertise your store if you're a successful HME retailer. But how
much do you spend on marketing — and how much should you be
spending? “A good rule-of-thumb is 5 percent of gross
sales,” Evans says.
Where should that 5 percent go? Here's what Evans suggests for
an advertising budget for an HME firm generating $1 million in
gross sales (5 percent of $1 million = $50,000):
Remember, says Evans, that “the goal in retail is to
maximize sales-per-customer, margins and, therefore, net
profits.” To do that, he says, you must know what your most
profitable product is — and strive to sell more.
Getting the Most from Benchmarking
Just as golfers benchmark to “par” and people who
are managing their weight benchmark to calories per day, HME
providers need to find industry key points for benchmarking,
according to Weeks.
To reap the most benefit from the effort put into benchmarking,
Weeks says, there are five things providers must do:
- Select the right benchmark
“There are three sources of benchmarks — internal,
competitive and universal; and two types of benchmarks — best
practice and norm,” Weeks explains.
Internal benchmarking involves looking within a company and is
best used when a company is “either producing the best result
in the industry or when its results are far below the norm.”
Competitive benchmarks, generally the most useful, are those most
often referred to and are derived from studies of the industry.
Universal benchmarking is a comparison to other industries.
“Best practice” is the best quantifiable result from
the source, while “norm” refers to the average for the
source. Weeks suggests that companies compare to the best practice.
“The challenge is finding the best practice among the
competitive and universal sources,” he says.
If a product or effort does not account for 5 percent of
revenue, expenses or man-hours, it is not important, Weeks says.
Instead, you might benchmark the 20 percent of your business that
accounts for 80 percent of your revenue. For example, Weeks says,
“it is common to find eight or nine payers that account for
80 percent of a home care company's revenues, and the same number
of product lines.” Benchmark those for a true picture of how
your company stacks up.
Weeks defines “throughput” as the output per time,
i.e., deliveries per day or intake per hour. “Quality,”
he says, “is meeting the expectation of the customer, whether
the customer is internal or external.” A provider can measure
throughput of billing and collecting as DSO, which can be lowered
to achieve a target by writing off accounts receivable. In other
words, “increasing throughput in any process can usually be
accomplished by lowering quality; increasing quality in any process
usually results in lower throughput.” The most efficient
processes balance both, Weeks explains.
How often should you undertake benchmarking? Weeks suggests that
the frequency depends on the rate of change in the company. Some
benchmarks need to be updated monthly, others quarterly or
annually. If your company is growing at a rate of 30 percent a
year, you will likely need to measure some items more frequently
than a company growing at 6 percent a year.
The HME industry being what it is — highly changeable
— companies need to revisit the benchmark at least annually,
Weeks says. “In our industry, we can expect the norms to be
changing rapidly for the next few years,” he notes. This
means that while normal productivity — the revenue per
full-time equivalent employee — has recently been reported at
$118,000, companies who work with this norm will suffer because
reimbursement rates are not rising.
Further, he says, the norm will improve as providers respond to
the new HME environment. Weeks points out that he has seen some
companies increase productivity by as much as 25 to 30 percent over
the past year in response to current conditions.
What's more, he cautions, “When an environment is changing
dramatically and rapidly, it is probably best to consider the
current industry norm to be the worst acceptable
performance.”
Bruce Brothis is education services director and senior
consultant for Alternative Billing Solutions, an HME billing and
consulting firm in Bloomington, Minn. He can be reached at
303/646-9600 or at bbrothis@hmebilling.com. Jack Evans is president of
Global Media Marketing, Malibu, Calif., and specializes in HME
retail sales, showroom design and merchandising, and marketing and
advertising. He can be reached at 310/457-7333 or at www.retailhomecare.com. Wallace Weeks is president of
Weeks Group, a Melbourne, Fla.-based strategy consulting firm. He
can be reached at 321/752-4514 or at wweeks@weeksgroup.com.
| Current | 35-40% |
| 30-60 days | 25-30% |
| 60-90 days | 15-20% |
| 90-120 days | 10-15% |
| Over 120 days | 5-10% |
| Region A | 9.9% |
| Region B | 8.2% |
| Region C | 11.3% |
| Region D | 11.8% |
| Yellow Pages | 5% | $ 2,500 |
| Newspaper | 20% | $ 10,000 |
| Radio/TV | 35% | $ 17,500 |
| Web | 10% | $ 5,000 |
| Direct Mail | 10% | $ 5,000 |
| Trade Shows | 10% | $ 5,000 |
| Open Houses | 5% | $ 2,500 |
| Miscellaneous | 5% | $ 2,500 |
| Total | 100% | $50,000 |
Benchmarking for the Future
As you are benchmarking your current HME operation, it's wise to
do so with an eye on the future, say three industry consultants.
The industry is a volatile one, and players already know that
competitive bidding and mandatory accreditation loom, that
reimbursement continues to shrink, that consolidation continues to
grow and the Centers for Medicare and Medicaid Services continues
to change the rules.
If providers want to continue in the business, they, too, will
have to change.
“The severe effects of the Medicare Modernization Act on
home health care will cause providers, manufacturers and
distributors to be making adjustments until 2010,” predicts
Wallace Weeks of Weeks Group.
One of those adjustments could be changing your payer base.
“The HME [providers] that are still 95 percent
Medicare/Medicaid are dinosaurs that will not be around five years
from now,” contends Jack Evans, Global Media Marketing.
Diversification is the key, he says. “[HME providers]
cannot remain simply providers [where] a third party pays for the
product, but they must transform into businesses in which they sell
products to other businesses and customers,” Evans says.
Bruce Brothis of Alternative Billing Solutions notes that
providers' margins have been shrinking and will continue to do so
with the advent of competitive bidding and decreases in allowables.
And that's not only Medicare/Medicaid. “Many private insurers
mimic Medicare allowables,” he says. Providers should look at
co-insurance, which is gross profit, he says.
Evans says that even now, successful HME providers are seeking
to shrink their dependency on governmental reimbursement.
Currently, he says, the revenue sources for profitable HME
providers break down this way: one-third Medicare/Medicaid,
one-third private insurance and one-third retail (cash, check or
credit card).
Governmental dependency could — and perhaps should —
continue to lessen for successful providers, these experts say.
