On average, 42 percent of DMEPOS provider revenues come from Medicare. When managers in the current environment consider how much of their company's revenue is from a single payer type, they often consider diversification as a means of mitigating the risk.
Diversification of payers may or may not be a smart option. In either case, it is a timely, strategic decision that should be carefully considered.
A case can be made for tossing the notion of payer diversification and becoming an all-Medicare provider. This is easier to defend in competition areas, which will soon include more than half of our industry. Companies that win Medicare contracts will see the mix of their Medicare business increase, no matter what it is prior to a contract.
So trying to diversify and execute on a Medicare contract at the same time are conflicting tactics. (Using diversification tactics before winning a contract is not a conflict.) Additionally, there is efficiency to be gained in specialization, and efficiency is critical in our industry. Finally, diluting the concentration of Medicare revenue for most providers cannot be achieved in an acceptable time frame.
If you do not choose to become an all-Medicare provider, following is an important model for managing diversification.
The first step is to determine the maximum allowable concentration (MAC) of sales that may come from any payer. MAC is the percentage of revenue loss that would make the company unprofitable. Here's the algorithm:
(1 - ((fixed costs/gross profit margin)/total sales)) × 100 = MAC
The answer equals the maximum percentage of sales that can be derived from any single payer before the loss of that payer's business becomes a threat to the company.
Next, consider which payers are a threat (those with sales in excess of MAC), and sum the revenue derived from them that exceeds MAC. That sum equals the sales to dilute.
It is important to point out here that the next calculation will cause many managers to conclude that organic sales growth cannot be the only method used to achieve a safe diversification. Nevertheless, a target needs to be set before the method(s) of achieving it are determined. That target can be set by dividing the sales to dilute ($) by the MAC (%) to determine required sales growth.
Based on industry averages, sales growth from non-concentrated payers will have to be about two times the annual sales from all payers. In other words, the average company will have to triple its annual revenue to reduce its concentrations to non-threatening levels. Remember that sales growth may not come from the concentrated payers.
So, how can managers diversify sufficiently in less time than an eternity?
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Target new revenue from low-volume payers. Acquire more sales from what are currently low-volume payers. One way to do this is to match referral sources to payers and products. With this analysis, the sales staff can pursue referrals from sources that show greater exposure to the low-volume payers. Marketing can use the analysis to promote the products that are indicated to have stronger ties to the low-volume payers and referral sources.
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Expand geographic coverage when there is little opportunity to expand business with low-volume payers, or when all available payers are near the maximum allowable concentration. Once you have found geographic expansion to be an acceptable risk, then select new geography based in part on the opportunity to acquire revenue from non-concentrated payers.
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Enhance sales power. Eliminate non-sales tasks from your reps. Sales/marketing representatives need face time with referral sources. Find out what competes with face time and eliminate it or reassign it, or reduce it with technology.
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Improve differentiation. Differentiate by selling the quantifiable results of your service, not the nebulous “quality service.”
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Identify and develop one or more niche markets. This requires an in-depth analysis of the market, the needs of the people or companies in it and the absence of a solution for a need. Include in your qualification the potential to diversify the payer mix. If competition is an issue, it is not a niche market.
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Buy revenue from other businesses. You don't have to buy the entire business unless the seller is unwilling to consider another option. It might even be possible to pay part of the purchase price with the sale of business from concentrated payers.
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Wallace Weeks is founder and president of Weeks Group Inc., a Melbourne, Fla.-based strategy consulting firm. You can reach him at 321/752-4514 or wweeks@weeksgroup.com.
