Let's define the somewhat unconventional term “product-payer combination.” The words “product” and “payer” are certainly clear. The “combination” is simply a way to describe the delivery of a specific product to a beneficiary of a specific payer. For example, one combination is “standard wheelchair-Medicare,” and another is “standard wheelchair-Blue Cross.”
Product-payer (customer) combinations are the primary driver of all business revenues and expenses and, thereby, profits. This concept transcends all industries, business sizes, business models and strategies. When products are delivered to different groups of customers, a different amount of time is consumed. Likewise, different amounts of time are consumed when different products are delivered to the same group of customers.
There are several reasons for the difference. Among them, it is more difficult to get the customers associated with one payer than another. Some products require more time-consuming delivery and set-up than others. And some payers require more burdensome documentation than others. These differences all can be measured with units of time. As the old saw goes, “time is money.”
If a product generates revenue of $200 and a $100 gross profit and is delivered to a customer that consumes one hour, would it be true that it is more profitable than the same product being delivered to a customer that consumes 1.5 hours? Sure. And if you have calculated the cost of each unit of time, you can also calculate the difference in cost and in net profit. To do so, subtract both the cost of goods and the cost of the time (used by activities) to determine the net profit.
There is also a difference in the amount of productivity afforded the company in the same situation. Productivity is equal to revenue per full-time equivalent employee. If it takes one hour to generate $200 in revenue, the productivity is higher than that for the customer that generates the same revenue in 1.5 hours.
One of the two best methods of managing productivity and profitability is to focus on product-payer combinations. The way to develop a focus is with the five following steps:
- Identify your company's significant combinations
Every senior manager should have access to a report of the company's revenue by product and by payer. Apply Pareto's rule to the reports to isolate the 20 percent of the products or payers that provide 80 percent of your revenue.
- Apply activity costs to each significant combination
When subtracted from the gross profit, this reveals the net profit contribution for each of the company's significant combinations. This often produces surprising results.
- Sort by contribution to net profit
From the list of significant combinations, select the 20 percent that are the most profitable. These should become the focus of your sales effort.
- Find the common characteristics of your most profitable
combinations
Such characteristics might include referral source, disease, disease state, geography or other factors. These characteristics can guide your marketing and sales functions toward finding more business of the same kind.
- Set targets and manage to them
The objective is to make the high-yield combinations you have discovered become your high-volume combinations. In every case, the sales team must be given all of the information gathered in the previous steps, plus a good understanding of the benefit of the new focus. Some providers have found that it is beneficial to change compensation plans as a part of the management plan.
The majority of providers in this industry need to develop “discounting capacity.” Discounting capacity is the difference between the acceptable net profit margin for the company and the actual net profit margin for the company. Any excess over the acceptable net profit margin, for example, could be sacrificed to win a Medicare bid or a contract with other payers. Even if all of the excess profit is sacrificed, the provider will maintain profits equal to its acceptable net profit margin.
To the extent that your HME company increases the percentage of revenue derived from its high-yield combinations, it can increase productivity and profitability and, thereby, create discounting capacity.
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.
