If good sales management is to result in profitable sales, then “bad” sales management is restricting the profit of many HME providers.
Some providers have realized that all revenue is not equal, and think they have proven it by analyzing the gross profit margins from various product-payer combinations, declaring the highest-yielding combinations as their sales targets. Even though this is a step in the right direction, it is certainly not enough — and is potentially fatal.
A look at some actual analyses of product-payer combinations from HME businesses can be a real eye-opener for those who agree that good sales management must result in profitable business.
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One such company, like many, made oxygen services a primary sales target. The directive to the marketing team has simply been “get oxygen referrals.” An analysis of sales according to product-payer combinations revealed that two payers, Anthem and United Healthcare, yielded revenue of nearly the same amount: Anthem paid $131.57 and United paid $134.29.
When the cost of goods data was calculated, the customers with Anthem were consuming $9.63, compared to $31.17 for United customers. Activity costs applied to each of the combinations revealed $66.86 for Anthem, slightly lower than the $68.27 for United. After subtracting the costs, the net contribution for oxygen from Anthem was significantly greater at $55.08 than for United at $34.85.
Some conclusions that can be drawn from this comparison are that: sales management is acquiring profitable business with the emphasis on oxygen; gross margin analysis correctly identifies Anthem as the better payer for the company; United consumes more time per claim than Anthem; and the most important, revenue alone is insufficient to declare a sales target.
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At another company (part of a health system with its own HMO), two product-payer combinations that generate significant revenue per claim are CPAP-HME, at $394.73, and diabetic test strips-BCBS, at $385.25. The size of these claims can make them attractive sales targets. The CPAP had a product cost per claim of $32.89, compared to $79.41 for test strips. Both have attractive gross profit margins.
When the activity cost is analyzed, the CPAP is found to consume much more time than the test strips. The activity costs for CPAP are $183.43, compared to only $37.93 for the test strips. The net profit contribution for each is still attractive. CPAP yields $178.41 per claim, but the test strips are awesome at $267.91 per claim.
In this case, a look at revenue would cause both to be regarded as essentially equal product-payer combinations, and very attractive. But if gross margin analysis were applied, it would falsely elevate the attractiveness of the CPAP business over the test strip business.
The sales decision that should be made is to allocate more marketing resources to finding referrals for the test strip business and to find more payers that will issue a contract like that of BCBS. Management should also decide to protect the CPAP-HMO business, but to let it be subordinate to the test strip-BCBS business.
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One final case that demonstrates bad sales management: A provider using gross margin analysis calculates the company's CPAP-Medicare business to have a 74 percent gross profit margin, which is equal to the gross margin of an enteral-hospice contract and is to receive equal priority in sales.
Further analysis reveals the revenue from CPAP is $129.68 per claim and enteral is $190.78. The cost of goods are $32.89 and $49.48 respectively, or 26 percent of the revenue. The big difference is activity costs. CPAP costs $190.72 per claim compared to $60.23 for the enteral.
In the end, the CPAP business is losing $93.93 per claim, and the enteral is making $81.07. The decision to treat these product-payer combinations equally is a very expensive mistake.
Finding good sales requires a provider to categorize sales by product-payer combinations; define desirable sales as those that produce an adequate net profit; allocate marketing resources proportionate to the net profit of the product-payer combination; and find new product-payer combinations that have similar characteristics to the best currently served.
Wallace Weeks is founder and president of Weeks Group Inc., a Melbourne, Fla.-based strategy consulting firm. He can be reached at 321/752-4514 or by e-mail at wweeks@weeksgroup.com.
