- By Vaughan Harshman, Ronn Schuman
- Mar 01, 2001
There are a lot of great reasons to pay attention to reimbursement practices. The provider that manages reimbursement poorly is slow to get paid at best and in danger of a fraud conviction at worst. However, it represents only one aspect of your business. If you execute reimbursement flawlessly and get your days sales outstanding (DSO) down to 35 days, which is half the norm, and you get your unbilled receivables to five days and you have no cash - is your business good?
The other side of reimbursement is to keep some of the cash that you work so hard to collect. To that end, we will show you methods that will help you keep more reimbursement dollars.
1. Reduce The Cost of Acquiring Patients
Selling expenses, or customer acquisition, is one of the most expensive activities that a company performs. It is a fertile area for profit improvement.
One thing you can do to accomplish this is to allow your sales staff to be as effective as they can. You will also take away the crutch, "I would have more time to sell if I wasn't chasing CMN's" or any other excuse that gets used. While I recognize that a sales person can sometimes use the need for the CMN as an excuse for the call, it should not be a routine activity of the sales person.
One provider we know had their sales people list everything they did. Then they analyzed the lists to identify every task that was not essential to getting referrals. The non-essential tasks were then delegated to other people in the company. Now, nothing stands between the sales staff and getting referrals.
Another way to get more sales with fewer dollars is to collect sales activity reports. Sales people often think that sales activity reports stink and are not essential. This is one report that is essential to sales. It provides the data for the company to become intimate with its referral sources and to measure and improve its sales strategies.
One of the greatest reasons for cash shortfalls in a business is not matching funding sources to assets.
How many sales calls can a representative make in a given time? How many of the doctors called will become an active referrer? What is the average number of referrals per month for one of your doctors? What is the value of the average referral? If you know the answers to these types of questions you can determine how many representatives you need, how to know if they are going to succeed and how to help them succeed.
Be seen every place in your market that you can. It costs very little to be seen. Send out press releases and attend professional and trade association meetings. The cliché' "out of sight, out of mind" is true. Did you ever push a disabled car? Which is more difficult, getting it to roll or maintaining the roll? At least one law of physics applies to business - the law of conservation of momentum. Be consistent in your sales and marketing efforts. When the momentum is lost, the effort and cost to restart it can be great.
Don't allow anyone in your company to waste sales and marketing efforts. Perfect follow-up on every lead and every order is essential. The cost is more than the loss of one sale. The cost is often the loss of a referral source that is worth many sales.
The most productive company we know has successfully made everyone in the company a sales person. The staff is either selling a doctor on their services or selling an insurance company on getting payment for a service authorized or getting a claim paid.
2. Manage Costs
One of our clients implemented annual budgets. The first year they got their managers to accept responsibility. The next year they got their team leaders or supervisors to accept responsibility. Now the woman who is responsible for authorizations is finding ways to reduce the telephone bill, and warehousemen are finding ways to reduce freight costs and the owner is enjoying the ride.
Have you hired talented people in your organization? If capable people have to work with poorly designed processes, can they be as efficient as their capability? All of your services are delivered by executing a variety of processes. Constantly make your processes more efficient. Efficient processes use less man-hours, sometimes less material, and always less capital. Ask your staff how to do it.
3. Don't Over Promise
One of our clients had seen their delivery expenses increase dramatically. The owner first thought that the delivery department was being mismanaged. What actually happened was that sales people had promised faster deliveries than they had to. Many of the patients did not need or expect such speedy deliveries. Sales had over-promised.
4. Show Your Staff How their Job Relates to Cash Flow, Profit and Sales
Why tell your billing department that they need to reduce DSO by five days if they don't know how it helps the company? Relate the DSO to cash that is consumed or liberated.
Our clients have had good success with company bonus plans that are related to profitability. Profitability is, of course, a function of sales and expenses. By tying the compensation to the bottom line, employees become as quick as the owners to point out what is costing them money.
5. Manage your Balance Sheet
Which financial statement reports your cash balance? The balance sheet or the income statement? Since it is the balance sheet, why not become proficient at managing the balance sheet? It is the key to managing cash flow.
One of the greatest reasons for cash shortfalls in a business is not matching funding sources to assets. Funding sources may be liabilities or equity. In short, current assets should be funded by current liabilities and non-current assets should be funded by non-current liabilities. Current means within one year and non-current means longer than a year. Generally, a loan should be for the useful life of the asset acquired with the loan.
Inventory represents your cash sitting on a shelf in the form of goods. If you want more cash in the drawer, then don't put it on the shelf. Find ways to turn the inventory more quickly. Study the turnover rates by item not by store. Use your management information system capabilities to help you. We often see providers who have perpetual inventory capabilities with their software, but don't use it, and thereby disable this aspect of working capital management.
Accounts receivable represents your cash sitting in your customers' checking account. Manage the DSO.
Unbilled receivables may not even show up on your balance sheet, but they represent your cash tied up in services that you have not billed for. Since they aren't always seen on financial statements, they are like silent killers. Learn how your billing system can report unbilled receivables and then manage them to the lowest point practical. Then ask, why is that a practical level?
The most productive company we know has successfully made everyone in the company a sales person.
Asset turnover is measured by dividing sales by net fixed assets. The greater the number, the greater the productivity of the assets. If you want less cash invested in operations, then find assets that generate more sales per dollar invested.
Cash conversion cycle (CCC) is a measure of the net amount of time cash is tied-up in transactions. It is expressed as an average number of days.
For example, if we purchase products and hold them for 30 days before their sale and wait to collect an account receivable for another 30 days, we have tied up cash for 60 days. However, our suppliers allow us 30 days or more to pay, so we have a net time of 30 days that our cash is tied-up.
We want to get the number as close to zero as practical. Dell has been at -8. It is not likely that a homecare company will get to zero, but we can try.
The formula for CCC is IDOH + DSO - APDO. The elements of the formula are as shown.
In order to implement and benefit from CCC management, you must have accurate data. All of the data required is available in the company's financial statements. The element most commonly missed is inventory. Some providers have not adopted perpetual inventory systems.
The method of collection, reporting and calculation must be consistent. One financial period's numbers must be relevant to the previous period.
Once you have the data, you may set strategies to shorten the holding period inventory. The strategies may include policy revisions, changing product mix, improved measurement and reporting systems.
Other strategies will be adopted to shorten the collection period. They may also include policy revisions, changing product mix, improved measurement and reporting systems, as well as customer selection, customer mix, process improvement, staff development, and more.
Then you will adopt strategies to lengthen the payment period. They may include vendor selection, financial policies, and so forth.
Finally, always remember that the reason to be good at reimbursement is not to get paid, but to give yourself the opportunity to keep some of the cash your company collects.Published in the March 2001 issue, Vol. 9, No. 3, page 14
This article originally appeared in the March 2001 issue of HME Business.