Paying Attention to Productivity

Productivity is a principle that has been gaining more attention in our industry during the last year or so. The reason is that managing productivity is key to managing the costs that stand between providers and profitability.

And, providers have greater need to use techniques like productivity improvement than ever before. In a recent talk with a longtime provider about reactions to productivity improvement techniques in the 1990s, he declared, “It was too damn easy to make money, so we didn't manage all that stuff.”

Productivity is equal to revenue per full-time equivalent employment. The economic benefit of improved productivity and, conversely, the cost of low productivity, can be calculated just as easily. For example, a provider with annual revenue of $2 million, a gross profit margin of 60 percent and a pre-tax net profit margin of 7 percent has productivity of $125,000.

If management determines that it should have productivity of $137,500, then the variance between actual and target is 10 percent.

The economic benefit of improving productivity equals 10 percent × 60 percent × $2 million, or $120,000 per year. Since the company's net profit was 7 percent, or $140,000, the new net profit would be 13 percent, or $260,000.

The statement that describes this example is the impact of a variance from the productivity target is equal to the percent variance multiplied by gross profit margin, multiplied by revenue.

There are at least three reasons why HME managers should measure and manage productivity.

1. Productivity can level the playing field between large and small providers. About 80 percent of the industry participants are small providers. It is unquestioned that large providers qualify for volume discounts on the goods they purchase that small providers will never get. What large providers (and small providers) don't have is a lock on the forces of imagination, focus and agility. Using these forces, some providers have already created productivity that wipes out any advantage derived from the volume discounts of large purchases.

2. Productivity adds or deducts discounting ability. Discounting ability is the Medicare provider's most coveted treasure.

   Discounting ability is the difference between a company's current net profit margin and its target net profit margin. If a company has a target net margin of 7 percent and a current net margin of 10 percent, it can offer a discount and still be profitable. Since productivity is reflected in the bottom line, changing productivity increases or decreases net profit.