Benchmarking HME Operations
Do you know if your HME business is being run efficiently and profitably? Without any national statistics, benchmarking is difficult, if not impossible. We visit, train and work with the best of breed HME providers on a daily basis, from urban to rural locations and from mom-and-pops to national chains. The following trends and numbers represent our findings and are presented here to help you benchmark your own HME operations.
HME Businesses are Unique
Yes, most HME businesses do carry much of the same medical equipment and supplies. Their showrooms, however, look unique because the most successful operations merchandise to meet their respective customer's home health care needs. This is called demographic merchandising and defines your product mix, depth and breadth.
In retail business today, the front third of a showroom generates 80 percent of sales. This means that the highest-selling categories and products are allotted more space near the front entrance. In HME, this translates into mobility and bath safety products for seniors and orthopedic supports and compression stockings for baby boomers.
A retail location is highly visible from a main thoroughfare and usually passed by a minimum of 10,000 cars daily. Store signage starts with a curb-side marquis that announces the HME business. Then building signage and graphics (for example, a painted wheelchair, scooter, lift chair or other easily recognized medical product) remind both current and prospective customers that medical equipment and supplies are available at your location. Front display windows also are a valuable marketing tool to educate your community as to the home health care products you stock and sell.
The average HME business is 2,500 to 3,000 square feet, which includes a showroom of 1,200 to 1,500 square feet plus a customer service desk, fitting room(s), restrooms, back offices as well as a storeroom or warehouse. For businesses located in prime retail locations where rent is a high premium, many of the traditional back-door HME functions are relocated to a less expensive commercial or industrial location.
The key to the success of retail HME businesses is to offer product selection and enable the customer to make a purchasing decision right there in their store.
These include rental equipment storage, clean room, insurance staff, pick-up and delivery.
Sales & Revenue
The average single-location HME generates $1 million to $1.5 million annually. The first year averages $60,000 to $80,000 per month, the second year $100,000 to $120,000 per month, and the third year $150,000 plus per month. Saturdays are usually the busiest days, although evening hours between 5 p.m. to 7 p.m. are also busy. For locations averaging 1,000 transactions per month, more than half occur during these periods.
Gross profit margin is an important indicator of profitability. Most profitable HME businesses average 45 percent GPM. High-ticket items such as scooters and lift chairs only average 35 percent, while inexpensive soft goods such as orthopedic supports and compression stockings can often generate 100 percent GPM.
These profit margins reflect HME businesses that are no longer 85+ percent dependent upon Medicare and Medicaid for revenue. Their revenue sources break down into thirds: one-third Medicare/Medicaid, one-third private insurance and one-third retail (cash, check or credit card).
Another benchmark is the gross sales generated per employee. While most industries average $100,000 per employee annually, successful HME providers average $110,000 per employee annually and highly profitable HME providers average $140,000 per employee annually.
The successful HME business generating from $1 million to $1.5 million per year will usually employee seven staff to fill the basic functions. These functions include manager, inside sales, outside sales (referral marketing), customer service, billing, office/register/phone and warehouse/delivery. Most start-up operations begin with three people (manager/sales, CSR/office/insurance and warehouse/delivery) who are forced to cross-train and cover numerous functions at the same time.
Sales people are most productive when provided with incentives
such as commissions and bonuses. They are usually paid a minimal base salary and then given 10 percent commission on all sales (or the commission structure ranges from 3 percent to10 percent based upon a respective category's profitabililty). The good salespeople make 50 percent of their base in commissions, while the excellent salespeople double their base salary from commissions. Sometimes salespeople are also paid a small quarterly bonus of 1 percent to 3 percent of net profits to help foster a team spirit.
At least one or two HME products can be found in most mass market outlets today. The key to the success of retail HME businesses is to offer product selection and enable the customer to make a purchasing decision right there in their store. This means displaying a basic product -- the reimbursable entitlement -- and an upgrade -- the better or best option.
Medical equipment is a hands-on business; consumers typically are not aware of the HME products available to them and they need to learn before they can buy. HME providers who display products outside of the packaging as samples on their showroom floor help close sales by facilitating the purchasing process of touch, try and buy.
Inventory turn greatly improves with the growth of distribution. Ten years ago, the HME market was notorious for only turning inventory three and a half times per year. Today, most profitable HME providers turn inventory at least nine or 10 times annually.
Advertising and Marketing
How much money do you need to spend on advertising and marketing? A good rule-of-thumb is 5 percent of gross sales. The bulk today (one-third of this 5 percent) is spent on mass media -- radio and TV. But TV advertising is only affordable in markets where cable and local network affiliates are in competition and are offering contracts for 30-second spots from $8 to $20 per spot.
Yellow page advertising is still necessary, but not to the degree it was 10 years ago. Due to the proliferation of local phone companies and telephone directories, both consumers and advertisers use any number of these books on a regular basis. The key is to identify your best local book and pay for one display ad, only as large as your competitor's ads, in the main HME section. This varies from city to city but is most often medical or hospital equipment and then bold business name and telephone number listings under other categories (such as oxygen or hospital equipment).
HME Advertising Budget
(5 percent of $1 Mil Gross Sales=$50,000)
Yellow Pages -- 5 percent -- $2,500
Newspaper -- 20 percent -- $10,000
Radio/TV -- 35 percent -- $17,500
Web -- 10 percent -- $5,000
Direct Mail -- 10 percent -- $5,000
Trade Shows -- 10 percent -- $5,000
Open Houses -- 5 percent -- $2,500
Misc. -- 5 percent -- $2,500
Total -- $50,000
Financial and Operational Benchmarking
- Provider Number Assignment
As an interesting side note to the rampant fraud and abuse in our industry, the number of provider numbers issued through the National Supplier Clearinghouse actually decreased significantly in 2003. This was due partly from the moratorium on the assignment of numbers late in the year and partly due to the crackdown on who actually qualifies to receive one. Here are the number of DMERC provider numbers assigned over the past five years (source - National Supplier Clearinghouse):
1999 -- 11,400
2000 -- 19,706
2001 -- 11,450
2002 -- 14, 334
2003 -- 9,474
There are currently (as of 6/10/04) 110,297 active DMERC provider numbers active in the United States. One could safely assume that this number will decrease as the bad eggs are weeded out of the industry and those responsible for the fraud and abuse are dealt with accordingly.
Days Sales Outstanding (DSO)
The most efficient way to financially benchmark your organization against the industry is to compare your DSO to the national average. The average DSO for our industry hovers, give or take a day or two, in the high 80s. DSO represents the average amount of time it takes from when $1 of revenue walks through your front door until you put that dollar in your pocket. DSO takes into account all aspects of the reimbursement process including intake, documentation, billing and collections; the higher the number, the lower your organization is performing financially. If you do not know your DSO or if it is not automatically calculated by your HME software, here is the simple mathematics:
1. Obtain company NET revenue data for a given time period such as a fiscal quarter, six months or one year. Divide this number by the number of days in the period. This will yield your average daily revenue figure.
2. Look at your current TOTAL NET accounts receivable total.
3. Divide your total net A/R by your daily average net revenue. Poof, calculation yields your company's DSO.
1. Net Revenue 1/1/2004 through 7/31/2004 = $7,525,000
$7,525,000 / 181 (# of days 1/1/04 through 7/31/04) = $41,574.59 (daily)
2. Net A/R balance on 7/31/2004 = $2,335,000
3. $2,335,000 / $41,574.59 = 56.17 DSO
Your target should be in the mid 40 range. If you have triple digit DSO it might be time to reevaluate your billing department. You might even have high HME DSO and not realize it if you have other revenue sources within your business, such as prescription revenue in a pharmacy. When properly run, HME is a solid, profitable business to be in but can be a major cash flow drain when it's not. To quote a popular TV ad, "What's in your wallet?"
A/R Aging Averages
Virtually all Aged Accounts Receivable reports are broken into columns that traditionally contain 30 days per column. The leftmost column is typically the "current" column followed by "30-60 days," "60-90 days," "90-120 days" and finally "over 120 days." Where a piece of receivable information falls within these columns tells the age of the receivable. The goal, obviously, is to have a lion's share of your receivables closer to the left side of the report rather than the right (closer to the "current" column and further away from the "over 120 day" column). Proper management of your receivables will keep your balances on the left side of this report. The following ranges represent the target percentages of claims in an Accounts Receivable report for a typical HME company (if there is such a thing!):
Current / 35-40 percent
30-60 DAYS / 25-30 percent
60-90 DAYS / 15-20 percent
90-120 DAYS / 10-15 percent
OVER 120 DAYS / 5-10 percent
Denials are an everyday part of the HME business. Any company that says they do not receive denials has spent way too much time underwater in that river in Egypt (da Nile!). The following chart represents average denial rates within our industry:
Total Industry Average = 26 percent
Rehab +15 percent = 40 percent
Oxygen -8 percent = 18 percent
DME +2 percent = 28 percent
There are many factors that contribute to denials including intake accuracy, insurance verification/eligibility and documentation, not to mention errors made by the DMERC. Yes, they do make mistakes! A recent Comprehensive Error Rate Testing (CERT) showed the percentage of claims denied or short paid by the DMERCs averaging 10.5 percent broken down as follows:
Region A / 9.9 percent
Region B / 8.2 percent
Region C / 11.3 percent
Region D / 11.8 percent
There are several operational benchmarks that merit mentioning as they have a direct impact on the financial benchmarks we have already discussed. Operational benchmarks include billing staff versus revenue, documentation turnaround, claim submission timing and collection aggression. These numbers are approximations and can differ based on the nature of your individual business.
- Billing Staff vs. Revenue
1. 1 biller for approximately every $600,000 in revenue
2. 80/20 biller rule
a. 20 percent of time spent banging keys, doing data entry
b. 80 percent of time working receivables
3. Both numbers above are directly affected by other duties a biller may have such as customer service, retail responsibilities and inventory.
Documentation such as CMNs, PARs, progress notes and pad scripts are the lifeblood of an HME company. Your follow-up frequency on your documentation plays directly into your billing, DSO and cash flow. Small HMEs should follow-up on documentation every 2 to 3 days at a minimum. Large HMEs should be following up daily. Your computer system should track outstanding documentation for you, but if it doesn't, you should have a manual tickler system.
Claim Submission Timing
With the advent of HIPAA and the ANSI electronic file format, you should be submitting a lion's share of your claims electronically. How frequently you submit rides with the size of your organization but should be no fewer than 3 times a week, preferably daily. Also remember that most insurance companies, including the DMERCs, have a daily cut-off time and if your claims are received after this time they are not processed until the next day's business. This is of particular importance on Fridays because you lose 3 days of DSO if your claims that are submitted on Friday do not hit the payer's books until Monday (four days if Monday is a holiday).
How aggressively you work collections and your receivables will depend mainly on the payer type. The following chart is a good benchmark on the frequency you should be working your outstanding balances:
*Medicare (electronic claims - ANSI format): at 21 days from submission
*Commercial Insurance (paper): at 45 days from mailing
*Commercial Insurance (electronic): at 30 days from submission
*Private Pay balances: at 30 days from mailing
This article originally appeared in the November 2004 issue of HME Business.