The most sweeping change ever in the history of home care began December 2003 under the stipulations of the Medicare Modernization Act.
This law will transform home care in five years. By 2010, there will be 4,300 fewer DME providers. If business practices remain the same, profit margins from Medicare revenue will decline by as much as 28 percent. Five companies will control more than 40 percent of the revenue of the market. Yet there will be providers whose profit margins will be as good as the best are today, and consumers will be as satisfied as they are today.
How will these providers do it? They will, if they haven't already, anticipate the effects on their company, plan their responses and execute their plan with steady heads, hearts and hands.
There are three fundamental requirements to succeeding as a provider in this new environment:
- Anticipate the effects
Sound anticipation requires analysis of the business, because each business will be affected differently. In 2005, there will be 25 HCPCS codes (21 of them subject to FEHBP adjustment and four for inhalation drugs) that will each have a different percentage change in their reimbursement. It will be rare to find even two companies that have the same annual revenue from each of these codes, and nearly impossible to find a significant number of companies that do.
To find some of its unique answers, a company must prepare a financial forecast to anticipate how much, and when, its sales and profits will be affected. The forecast must consider both payer and product mix. In some instances, the forecast will be better if revenue and cost are addressed right down to the HCPCS level.
Effects go beyond the unique financial impact on a company. There will be responses from rivals, suppliers, payers and new entrants. There will be substitutions of services, products and business models. Managers who do the best job of anticipating will be equipped to do the best job of planning. This is how companies skate to where the puck will be.
- Produce targeted sales growth
Sales growth (with a constant payer and product mix) will improve profitability. For example, a provider with a net profit margin of 7 percent will have a higher net profit margin on the next referral. The reason is that the company doesn't have to add a new management team, rent more space or get a new telephone line to add the next sale. So, the next sale produces a higher profit than previous sales.
Sales growth can improve profit even more if it is targeted. Providers who do a good job of acquiring targeted customers are also reducing their customer acquisition cost. The concept is much like economies of scale. Targeting can be specific to payers, diseases, products, geography, demographics and more.
One caveat about sales growth is that it consumes cash. Each company has a sustainable growth rate (SGR) based on its current financial performance. If a company grows faster than its SGR, new capital will be required. Managers should determine the company's SGR and, if they plan to grow faster, should have a capital plan.
- Improve productivity
On average, the industry has been producing about $118,000 annual revenue per full-time equivalent employee. That also equates to spending 27 percent of revenue on salaries and wages, which is the second largest expense behind the cost of goods. Companies incur salary and wage expense because they pay people to do things. Managers must examine what people are doing and why they are doing it.
Productivity improvement may be achieved by eliminating processes, activities and tasks; reducing the number of times an activity is performed; and reducing the time to perform a task or activity once.
Opportunity in home care will continue to be driven by a growing demand for products and services. Companies that succeed will do so because they accept the challenges of preparing for next year while working in this year, thinking of new ways to do things while breaking old habits and making the tough decisions while being compassionate.
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.
