Building the Bottom Line

I recently had the opportunity to visit with an impressive man.

Matt Kneeland is president of Care Medical, headquartered in Visalia, Calif., with seven branches in the state's central valley. His HME has been in business for 10 years and, as best I can tell, the company has done pretty well. So well, in fact, that its bottom line is improving while reimbursement falls.

Mr. Kneeland was kind enough to share his answers for the following Q&A, which proves that this tough challenge can be accomplished.

Q: Your company has experienced greater profitability during the past two years in spite of declining reimbursements. Without revealing your profit margin, by what factor has profit increased?

A: Three percent (as a percentage of sales).

Q: Was your company already profitable?

A: Yes, we actually were operating with a pretty healthy profit, both cash and accrual.

Q: Did you change your purchasing practices?

A: Not really. It was interesting to see that our [cost of goods sold] actually went up by 2.9 percent of sales during the same period.

Q: Since COGS increased, gross profit margin decreased. Was that because products cost more or because reimbursement declined on products?

A: I feel that due to the cuts we have seen this year in Medicare, coupled with California's cuts to Medi-Cal, we are seeing less reimbursement per item, which is driving up our COGS as a percentage of income.

Q: So you really improved profit by 5.9 percent, but reimbursement cuts took 2.9 percent back?

A: Yes.

Q: If purchasing practices didn't contribute to the new profit, what did?

A: After determining which of our product-payer combinations delivered the best profit scenarios, we had the ability to aim our entire organization at those products without sacrificing our clinical services.

Q: How did you determine which product-payer combinations were most profitable?

A: I attended a workshop … where I learned to use activity-based costing to determine each of our product's individual profitability.

Q: As a result of your findings, did you eliminate product lines or reject payers?

A: Well, because we still desire to be a single resource to our customers, we didn't so much eliminate products lines as we did limit who we market to and which products are called our “Care Focus Products.” We did have to meet with several hospitals and sever our relationships because almost all of the business we were getting from them was not profitable.