Prior to the early 1980s (which is not ancient history because none of us are ancient), hospitals tried to manage length of stay — up. This increased both revenue and the profit margin on that increased revenue. The hospital environment has changed dramatically since then, but we can learn from hospitals' management of length of stay.
For home care companies, we can relate length of stay to length of service. If providers manage to extend length of service, they will experience more rapid revenue growth and increased profit from each patient/customer. The product lines that offer a good opportunity here are oxygen, diabetic supplies, incontinence, respiratory meds, enteral nutrition, urological, continuous positive airway pressure (CPAP) supply and transcutaneous electrical nerve stimulation (TENS).
For the sake of example, consider two fictitious companies. Each provides the same rental product, which yields an average revenue of $230 per month. Each is selling at the same rate, one new patient per month. However, one of them (Long Co.) has a length of stay equal to 16 months, and the other (Short Co.) has a length of stay equal to eight months.
At the end of the first year, Long Co. has generated revenue of $17,940 from the product, nearly 15 percent more than Short Co., which, from the same sales activity, generated revenue of $15,640. In the second year the difference is even more striking: Long Co. generates $44,160 in revenue and Short Co. generates $22,080 — half that of Long Co. All the while, each is bringing on one new patient per month.
Additionally, the cost to service these two sets of business is different. Let's assume both of the companies have identical cost structures and efficiencies in processing sales. For each company, costs are: completing the intake form, $7; verifying coverage and getting payment authorization, $4; delivery and set-up, $40; recovery of equipment, $25; and maintaining equipment, $10. At the end of the first year, Long Co. will have spent $612, and Short Co. will have spent $752. For the second year of the product line, Long Co. will spend $892, while Short Co. will spend $1,032.
When we get to the bottom line, the product has contributed $60,596 for the two years for Long Co., while the contribution for Short Co. is $35,936. The only difference between the two companies is length of service. And that is a very distinct difference.
For a company to realize the benefit of managing length of service, it must first determine the current length of service for its recurring revenue product lines. The universe of patients who must be considered are those who have been discharged. The basic math involves subtracting the first date of service from the last date of service. It is probably not necessary to include more than three years' history in the sample.
Once the initial calculations have been made, a model for subsequent data collection can be developed. This may be different from one company and billing system to another, so we can't provide a cookie-cutter solution. However, this is the point to set into place a method for getting the data to measure the results in the future.
Once a baseline has been established, it is time to develop and execute tactics to extend length of service. Consider the following methods:
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If payment authorization is required, develop methods that lead to longer average authorizations. This not only reduces authorization costs but builds a more consistent relationship with the patient.
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Make scheduled outbound calls for supplies. Not all providers do. Waiting for the patient or caregiver to phone in a request for a reorder puts you at risk of losing the patient.
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Identify which payers are linked to the patients with the longer lengths of service. Once this is known, the physicians and other referral sources that are attached to the longer-term patients and payers can be identified and targeted for greater effort.
Most providers have products that produce recurring revenue. Few, however, are managing length of service, making this an excellent opportunity.
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.
