Operations

Benchmarking HME

Do you know whether your home medical equipment business is being run efficiently and profitably? Without any national statistics, benchmarking is difficult,

Do you know whether your home medical equipment business is
being run efficiently and profitably? Without any national
statistics, benchmarking is difficult, if not impossible.

We visit, train and work with the best HME companies on a daily
basis, from urban to rural locations and from mom-and-pops to
national chains. The following trends and numbers represent our
findings and are presented here to help you benchmark your own HME
operations.

FINANCIAL BENCHMARKS

Days Sales Outstanding (DSO)

The most efficient way to benchmark your organization
financially against the industry is to compare your DSO to the
national average. The average DSO for our industry hovers, give or
take a day or two, in the mid-to-high 80s.

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. DSO takes into account all aspects of the
reimbursement process (intake, documentation, billing and
collections), and the higher the number, the lower your
organization is performing financially.

If you do not know your DSO or if it is not automatically
calculated by your HME software, here is the simple
mathematics:

  1. 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 average DAILY
    revenue figure.

  2. Look at your current TOTAL NET accounts receivable total.

  3. Divide your total net A/R by your daily average net revenue.
    This calculation yields your company's DSO.

Example:

A/R Aging Averages

  1. Net Revenue Jan. 1 through July 31, 2008 = $7,525,000

    $7,525,000/182 (number of days from Jan. 1 through July 31) =
    $41,346.15 (daily)

  2. Net A/R balance on July 31 = $2,135,000

  3. Denial Rates

    $2,135,000 / $41,346.15 = 51.64 DSO

Your target should be in the mid-40 to mid-50 range. If you have
triple-digit DSO, it might be time to reevaluate your billing
department. You might even have high HME DSO and not realize it if
you have other revenue sources within your business, such as
prescription revenue in a pharmacy.

HME is a solid, profitable business to be in when run properly
but major cash flow can drain when it's not. To quote a popular TV
ad, “What's in your wallet?”

Virtually all aged accounts receivable reports are broken into
columns that traditionally contain 30 days per column. The leftmost
column is typically the “current” column, followed by
“30-60 days,” “60-90 days,” “90-120
days” and finally “over 120 days.”

Where a piece of receivable information falls within these
columns tells the age of the receivable. The goal, obviously, is to
have a lion's share of your receivables closer to the left side of
the report rather than the right (closer to the
“current” column and farther away from the “over
120 day” column).

Proper management of your receivables will keep your balances on
the left side of this report. The following ranges represent the
target percentages of claims in an A/R report for a typical HME
company (if there is such a thing):


Current 35-40%
30-60 Days 25-30%
60-90 Days 15-20%
90-120 Days 10-15%
Over 120 Days 5-10%

Denials are an everyday part of the HME business. Any company
that says it does not receive denials has spent way too much time
underwater in that river in Egypt (da Nile).

There are many factors that contribute to denials, including
intake accuracy, insurance verification/eligibility and
documentation, not to mention errors made by the DME MACs. (Yes,
they do make mistakes.)

The following shows average denial rates within our industry for
various types of claims:


Industry average for all claims = 26%
Rehab claims (+15%) = 40%
Oxygen claims (-8%) = 8%
DME claims (+2%) = 28%

Claim Processing Errors

The most recent (12 months ending Sept. 30, 2007) Comprehensive
Error Rate Testing (CERT) showed the percentage of claims processed
in error by the DME MACs averaging 8.2%, broken down as
follows:



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