Tools of the Trade

When it comes to building a home medical equipment business, it pays to have the right tools. No, we're not talking wheelchairs and oxygen concentrators here — we're talking about financing and protecting your company as it grows.

The choices HME providers make in obtaining loans, leasing equipment and taking out insurance can help construct a firm business foundation — one that experts say can be the difference between success and failure. But understanding your options in these areas can be complicated and confusing.

What, for example, is the best way to fund expansion? When should a provider lease equipment? Which insurance coverage is must-have and what is optional? For answers to these and other questions, HomeCare sought advice from industry professionals and successful providers.

Getting Ready for Growth

“One of the challenges in the HME market is that, as you grow, it takes additional capital,” says Mike Kloos, vice president of sales and marketing for VGM & Associates, the Waterloo, Iowa-based buying group. “Every time you get new patients, there is a need to buy new equipment to service those patients. Growth takes a substantial amount of capital.”

Where does that capital come from? Of course, committing your own funds is often the first financing step, and is certainly a good indicator of just how serious you are about your business. But many HME providers don't have enough money to finance growth themselves. Or if they do, they don't want to tie up ready cash in inventory or company acquisitions. Banks, then, are an obvious source of funds, and alternatives also include commercial finance companies, venture capital firms and even family members or other business “angels.” For equipment purchases, providers also look to manufacturers and buying groups for help.

The reality for HME providers, says Doug Korey, managing director of Shrewsbury, N.J.-based Ziegler Healthcare Capital, is that “there are limited sources out there for capital. If you need $1 million, there are very few venture capital funds that will fund that.”

Dexter Braff of The Braff Group, a health care merger and acquisition firm in Pittsburgh, agrees, noting that industry lenders are most comfortable with asset-based loans, which, as their name implies, are secured by a company's assets. In other words, he explains, “If you don't pay me, I have assets to sell off to get paid back.”

Often, asset-based lending can fill the bill for creating new businesses, internal growth or working capital. However, Braff points out, it's not the answer for a company that doesn't possess an asset base large enough to generate the loan amount it needs. “So lending then is based on cash flow, and it is more difficult to obtain because it is more risky to the lender,” he continues. “Banks are very conservative, so you have to go to another type of company — the cash-flow lenders.”

Cash-flow loans are secured by the business itself, and the loan amount is determined by the business' cash flow. “These companies will loan in the low millions, but they get [your] company if you don't pay them back,” Braff warns.

Exactly which assets providers use as collateral to secure their loans is another key issue. For example, loans can be financed based on equipment, cash flow, accounts receivable and seller debt or equity in the business. “Times are changing in e Trade financing,” says Ziegler's Korey, whose company finances acquisitions through a blend of debt and equity. “You don't have to sacrifice equity in order to expand.” Still, he continues, “whatever kind of financing you are using, you are using the equity that you have built up. You are taking a smaller piece of your pie to buy a bigger piece of pie.” He cautions against committing to loans of any type that would tie up equity or cash flow. “You never want to leave yourself without enough powder to finance additional growth.”

Korey also suggests seeking loans from lenders familiar with the health care industry. “Health care as a whole is a very complicated industry, and it has some issues that are very troubling. I wouldn't make an application [for a loan] to someone who hasn't [been involved in] health care before.”

He points out, however, that choosing such a lender will, in all probability, cost you. “Health care lenders are not the cheapest form of financing,” Korey acknowledges.

On the other hand, these lenders are more likely to understand the vagaries of the HME business, to be somewhat flexible in their terms and to offer insights on the best way of funding HME business growth.

Such understanding is important, says Rick Muckelrath, director of marketing services for Anaheim, Calif.-based Medical Capital, a national finance company that specializes in serving the medical field. “[Lenders] need to be knowledgeable about the industry. If you're hungry for a taco, you don't go to a German restaurant.”

Medical Capital, for example, purchases accounts receivables. Rather than waiting — sometimes for months — for reimbursement from third-party payers, providers can get cash quickly and use it to, say, purchase more product. “It allows capital flow to make your business grow,” Muckelrath says.

Banks and finance companies are not the only ones who will fund HME providers. Some manufacturers, like Pride Mobility Products, Exeter, Pa., offer a variety of ways to finance their products. Pride, for example, has a financing program that HME companies can extend to end users.

“Look at a furniture store,” notes Cy Corgan, Pride's national sales manager. “Financing those products is an important part in the retail environment in which they are selling, and the HME environment is no different. This is an alternative way for [customers] to afford the product, to buy the product within their own financial means.”

Maximizing Your Cash

Equipment leasing offers HME providers an alternative to borrowing money, and has an advantage over purchasing, because it does not tie up available cash. “Leasing,” says Bob Keller, branch manager of Pinnacle Capital, a Tacoma, Wash.-based finance company, “is term financing. It isn't just for people who can't afford [to purchase equipment outright]. Some of the biggest companies in the industry use leasing.”

Indeed, if you are seeking to build inventory and maximize cash flow, leasing is often the best way to do so. And in recent years, manufacturers and buying groups have made it much easier for HME providers, by developing a wide variety of leasing programs.

“The number one benefit of leasing is cash flow,” explains VGM's Kloos. “It allows the equipment to pay for itself. Typically, the provider is being reimbursed on a monthly basis either by Medicare or the insurance company, and [the provider] takes part of that check for the lease payment and puts the rest into the operating budget. Instead of $10,000 up front, [the payment] may be $300 a month.”

Terry Luft of Central Medical Equipment, Harrisburg, Pa., views leasing as a good way to pay for long-term rental equipment. The company's owner for 22 years, Luft says he has leases through VGM and his own bank. “If it's a long-term product, we'll pay for it over the long term. If we do oxygen, for example, we're leasing it because we're going to be getting income off it for a long time.

“You have to know where your cash flow is,” he explains. “It pays me, if rates are low, to lease the equipment, even if I have money in the bank.”

Leasing also can help in building up inventory, Luft notes. “It helps that you don't have to scramble for inventory. You can buy 40 oxygen units and you're spreading your payments out. You're paying for the product as you're using [them].”

While you can find a vendor to lease just about any HME item, not every piece of equipment should be leased, he points out. “[You] can get an easy lease for ambulatory aids and get the money today, but you're paying for it for 24 months, long after it's gone,” says Luft, who instead uses capital to buy such goods.

Jeff Wills, owner of Canadian Valley Medical Solutions, Oklahoma City, has seen a lot of what he calls “mismatches” in his 13 years in business. When the life of the lease and the reimbursement for the equipment do not match up, he explains, “you end up in a mismatch of your assets and liabilities.”

Kloos of VGM cites as an example a provider who leases a continuous positive airway pressure device for 60 months. Since that is a capped rental item, “at the end of 15 months, there won't be any reimbursement coming to that provider” for the CPAP, but he still must pay for it for another 45 months. “Structure the lease appropriately to match the equipment,” Kloos advises.

There are more caveats related to leasing plans, industry players caution. “Leasing is a form of debt,” says The Med Group's Bill Miller, president of the Lubbock, Texas, buying group. “Some people can get into a scenario where they are using money generated from the lease as cash flow. Providers tend to be thinly capitalized anyway. The lease at first glance looks attractive, but there is one thing you can't get away from: Where there is risk, there is premium for the money.” It's important, he says, to know the lease rate factor and to what annual percentage rate that converts.

“There are many creative lease plans out there that do meet needs, and the cash flow from the lease services the lease payment and the term of the lease,” Miller notes. For example, some manufacturers will lease oxygen concentrators with terms of 180 days interest-free payment. “That's very attractive if, at the end of six months, you can pay the thing off.”

These days, the no-interest deal is not unusual, according to Central Medical's Luft. “A lot of manufacturers are offering low-interest leases, no-interest payments for six months or no interest for a specific period of time,” he says, noting that some manufacturers are offering him CPAPs at no interest. “Our manufacturers are being our banks to get our business.”

Even finance companies may offer deals. Pinnacle, for example, will finance “100 percent to keep the outflow of cash to a bare minimum,” Keller says. “We also provide deferred payments at the beginning of the lease or loan so that the customer can get the equipment placed into service and [have] time to get their third-party reimbursements before they have an initial outlay of cash. If you don't do that, you're putting the [HME] provider in a bind. It takes so long to get reimbursed.”

Miller suggests establishing a relationship not only with manufacturers and buying groups but also with a local bank. “Get them into your business,” he advises. “Once they understand your business, you have someone who can help you judge whether or not a lease or a working capital loan or a revolving line of credit best suits your line of credit and liquidity needs. And the time to do that is before you need the money.”

Protecting Your Business

When it comes to buying insurance for your business, it's easy to talk yourself into taking shortcuts. After all, insurance is a “what if” proposition: What if there's a fire? What if the delivery truck is involved in an accident? What if someone trips and falls in your showroom?

“A lot of people do not like paying for insurance,” states John Spragle, president of Waterloo, Iowa-based VGM Insurance, which has been serving HME providers for 15 years. “My philosophy is to buy what you can afford and buy what you can't afford to lose. If I've got a business I've built up and I carry $300,000 [worth of insurance but] I've got $1 million in assets, can I afford to lose $700,000?”

Probably not. So, the experts say, you need to carry at least adequate coverage — but what is adequate?

For starters, providers need a core general liability policy that covers normal day-to-day activities, advises Bill Thompson, senior vice president of Smith Bell & Thompson, Burlington, Vt. “This covers just the general business operations, such as people coming onto the premises and being injured, unintentional advertising injury to another party, [and] operations from a products liability standpoint.” The latter, he says, covers damages that could arise when a provider re-leases products to someone else. Such coverage can be excluded from a general liability policy, so providers need to check the specifics about product liability.

While a general liability policy normally includes premises and operations liability, products and operations coverage, and personal and advertising injury, it does not cover professionals, such as respiratory therapists or nurses. These specialists must be insured under separate professional liability policies, and experts suggest that providers who work with such people carry such policies. Providers also should require these professionals to maintain their own personal liability coverage, often available through professional associations. “Even if the person is an independent contractor, there is a vicarious liability,” Thompson explains. “[Providers] can't delegate their liability to an independent contractor. They can be held liable.”

Providers also should carry policies for property, to guard against fire, theft and other hazards that would lead to property loss; auto, because HME is often a mobile business in which products get delivered in motor vehicles; and workers' compensation, which is mandated by law and covers work-related injuries and illnesses that employees may suffers.

“[Providers] usually have a big property exposure,” according to Patti Gonzalez, director of commercial lines for Vienna, Va.-based Campania Management, which sells HME-specific insurance to individual firms and through groups such as the National Association for Medical Equipment Services (NAMES). She notes that even if a provider is working out of his or her own home, property insurance is essential because homeowner's insurance normally will not cover business-related losses.

HME providers also may have another unusual consideration: equipment such as a hospital bed or an oxygen concentrator that is in transit and is kept away from the business, for instance, in an end-user's home. General property policies do not cover such situations, so providers must purchase coverage separately.

Some providers, however, choose to pass on buying such insurance. Luft of Central Medical Equipment is one of them. “My insurance covers everything under my roof, but once it leaves my building, it doesn't cover the equipment,” he says. The decision has cost him. He recently lost a concentrator and a liquid oxygen system when a woman's house burned down and she had no insurance.

Still, Luft chooses not to carry this type of insurance. He's had only three losses in 22 years, so he feels it's cheaper to absorb the loss than to pay the premium — but he does ask for copies of a customer's insurance when he places equipment now.

Another type of coverage some providers refuse is product liability insurance. “HME providers say they shouldn't have product liability because they don't manufacture the product,” Thompson says. “That's generally true, except that everyone in the [product] chain will be named” if there is a lawsuit. Also, he notes, if a provider relabels or alters a product, the provider, not the manufacturer, could be the primary defendant named in the suit.

“Or, if [providers] deal with imported products and there is not a domestic location for the insurance company to go after, they'll come back to [the provider],” Thompson says.

There are plenty of other types of insurance coverage for an HME provider to consider, too.

Business income coverage is one such policy, says Gonzalez of Campania. If providers have a property loss that puts them out of business, the policy will pay for business interruption. “It will pay for your income (averaged from the prior year), expenses that continue, such as phone and electric, and maybe salaries.”

Thompson adds, “That's an optional coverage that, as businesses get larger, they might want to add.”

Another optional policy covers employee theft. According to Ed Dressen, an associate with the Corridor Group, a home health consulting services firm in Overland Park, Kan., “That's a coverage that, when you first start up a company, you probably wouldn't think about, but you'd want to later. It would cover an employee stealing not just from your business but also from a patient.” Whether or not you obtain such coverage, he advises, at least do a criminal background check on the employee. “If you have [an employee] going into someone's home, you're liable for it,” he says.

Several insurance authorities also suggest purchasing umbrella policies, which tend to offer high-dollar coverage at relatively little expense. “An umbrella policy will increase limits and give [providers] an added layer of protection over all underlying scheduled policies,” Thompson explains.

For larger HME businesses, experts say, insurance that guards the personal wealth of company officers and directors is another option. And for companies with a big workforce, employment-practices liability might be wise. This covers the costs of fighting lawsuits that charge discrimination or sexual harassment (though no insurance can protect against the penalties for actually breaking the law).

As you shop around for insurance — and shopping around is highly recommended, since policies and costs vary greatly — it's critical to seek a company that knows the HME business, experts say. Make sure your agent or broker knows your business at least as well as you do. HME can look deceptively low-risk, so don't buy a policy from those uninformed about the industry.

And there's more advice: Don't let price alone dictate whether you do business with a particular insurance company. “Price is an important consideration, but too many people are focused just on the price and not on what they are really getting,” says Thompson of Smith Bell & Thompson. “[The policy] is a contract the insurance company has promised to pay if you have a covered loss. Every policy has different terms and conditions.”

Also, check the carrier's strength and stability to make sure the company will be in business when you need them. “A lot of carriers that had lower prices are now out of business,” Thompson notes.

“It now goes into six figures what we're paying for insurance,” says Central Medical's Luft, who says he keeps policy deductibles as high as possible to lower his premiums. Nonetheless, he continues, “We believe in insurance … Whenever there's a claim, it's worth it.”

VGM's Spragle concurs. “You can do nothing wrong and still pay a lot of money,” he says. “All [someone has] to do is name you in a suit and you get an attorney.”

Or, if you have insurance, the insurance company gets the attorney.

Editor's Note: We hope the information in this article is helpful, but be aware that it may not be applicable to your individual business situation. The financing or insurance that any provider obtains may be dictated by a wide range of factors, including size, location, type of business and existing growth opportunities, to name a few. Do your homework, seek counsel from reputable professionals and practice sound financial management to keep your HME business solvent and profitable.

Smart Money Tips

To obtain the best financing deal — an appropriate loan at a reasonable rate of interest, with flexible terms — experts offer these suggestions:

• Create a business plan that spans at least 12 to 24 months. Know where you are going, what the reimbursement risks are and what the challenges of doing business are in your particular environment. Be certain how any type of financing will affect your plan in both positive and negative ways.

• Choose a lender that knows the business, understands reimbursement issues and has a track record in the HME arena. Ask about success stories: Has your potential lender helped another provider grow his business?

• Get references — and check them.

• Look for flexibility. Make sure the lender can offer convenient, flexible terms that are tailored to fit your individual circumstances. Do not tie up all your company equity or cash flow in any loan.

• Determine what it will cost to do business with the lender. Will there be any upfront fees, for example?

• Make sure the company you are considering is compliant with the Health Insurance Portability and Accountability Act (HIPAA).

• Provide complete financial statements to the prospective lender, including audited financial records,s if you have them.

• Be prepared to answer the lender's basic questions: How will you use the loan? How much do you need to borrow? How will you repay the loan? Additionally, make sure you can address topics like current legislation affecting the HME industry, your methods for dealing with challenges during the past few years and reimbursement issues.

• Whatever you do, don't try to finance business growth on a credit card. “One of the worst things a provider can do is put business debt on personal credit cards,” says Bill Miller of The Med Group. “Most independent [HME] providers should be aware that when their credit is being evaluated, their personal credit and the business credit form a matrix of their credit score. “Credit cards are expensive debt. It's just a short-term solution.”

To Lease or Not to Lease …

That could be the question. Industry players offer these guidelines to ensure you make the best decision:

• Match financing terms to the reimbursement life of the equipment. If you are not being reimbursed for it monthly, why should you make payments for 60 months?

• Choose a company that knows the HME industry and has a track record. Just as with traditional loans, make sure the company you're considering can offer convenient, flexible terms that meet your needs.

• Preserve cash flow and credit lines. Once you get behind the eight ball, you're doomed, because lenders will not go any further with you, according to Bob Keller of Pinnacle Capital.

• Consider a master lease or loan agreement that makes it easy to add a schedule to the agreement every time you add equipment. Remember, though, that there will be new terms for each new schedule.

• Make sure you know what the true costs of the lease will be. For example, converting the lease rate factor to an annual percentage rate could be a consideration, because the lender may quote only a daily factor. Get advice from professionals, such as a reputable accountant, who can help you determine true costs and can provide an independent perspective.

Are You Covered?

In purchasing insurance, authorities say, you can take some measures to minimize cost and risk:

• Go with a company (or agent/broker) that knows the HME business and has been in business for a while.

• Don't buy any insurance policy on the basis of cost alone. Check the company's service record: Does it respond quickly? Does it pay fully and fairly on covered losses? Are its agents accessible and knowledgeable?

• Determine what you can afford to lose, and don't underinsure.

• Re-evaluate insurance policies annually, and upgrade coverage as your business grows.

• Take preventive loss measures in operating your business. Develop a risk management plan, identify exposures to liability and find ways to reduce the potential for loss.