- By Vaughan Harshman, Ronn Schuman
- Nov 01, 2001
Have you considered how much it costs your company to deal with reimbursement issues? Want to reduce reimbursement issues in your company? Here is an idea that may help.
Imagine that you are at a chamber of commerce reception and someone whose business you perceive as successful, tells you that their profit margins are falling because of competitive and regulatory upheaval. Your first thought might be "I didn't know they were in the homecare business too." Then they ask you what you think they should do about it. You begin to think about a response rather quickly, since you have other people to talk with at the reception. You consider that your company has dealt with reductions in reimbursement, competitive bids for contracts and that your profit margins have been hammered.
You also consider that one of the results of lower profit margins is that it raises the break-even point for a business. If you don't change the way you do business, you must sell more of the lower margin goods and services to keep your earnings level. If the break-even point happens to increase at a rate faster than the market volume, you will only stay profitable if you increase your company's market share. If you increase market share by being the low bidder, you will raise your break-even point even more. Then you are on the "wheel in a wheel."
A smart strategy is to be different from your competitors.
So, other than cutting costs, which is sort of obvious, what else can you tell this guy? All of a sudden, one of those inspired ideas nails you right between the eyes. You recommend that their company change its revenue mix to include higher margin goods and services that complement what they are already doing. You know that these inspired times last for brief moments. The reason that they are so brief is because someone who is awed by your idea always asks another question, and here it comes. "Great idea! How can I do it?" Here is how you answer that question:
Some of the people in the homecare industry who have suffered from falling margins (that almost sounds like a medical condition) are boosting their retail and cash sales. Increasing cash sales accomplishes strategic objectives that improve profitability, gives new stability to the company, and avoids getting on that "wheel in a wheel" that results from having to sell more low-margin goods or services just to stay even. There are at least four strong benefits to changing the revenue mix.
First: Diversification of Payer Sources
Generally 10 percent or more of your business from one source is considered a concentration. It is virtually impossible to be in this industry without what all other industries consider a dangerous concentration in customer base.
Adding the right new products to the retail mix will require some thought and research.
The right selection and marketing of cash-sale products and services will increase the percentage of your revenues from an entity other than Medicare or MCOs, and thereby reduce the adverse effects of reimbursement reductions and competitive bids. For example, the next time that Medicare effects a reduction like they did with BBA '97, a business that has 40 percent of their revenues from the services getting the reduced fees and a net profit margin of 12 percent, will have a net profit margin of 2 percent. A provider who has 25 percent of their revenues from the services getting the reduced fees and a net profit margin of 12 percent, will have a net profit margin of 5.75 percent. Neither has great results, but the more diverse company still fares better.
Since health care has pretty well been "commoditized," a smart strategy is to be different than your competitors. One company we have worked with became unique in their market by offering herbal or botanical medicines. They still have their respiratory, infusion and DME business that looks like most of the other businesses in this industry, but no one else in their market offers botanicals. By the way, margins are better and they are cash sales.
About five years ago, one owner of a New England business used uniform sales to increase profit margins. By bringing other health care professionals into their business, they got referrals for ostomy and diabetic supplies and for their important breast pump rental business. As a result, they were able to get out of the respiratory business.
Another company that is heavy in the mobility business increased their sales of lifting equipment and home modifications from about 10 percent of their business to 35 percent of their business in a couple of years. Not only do they have a cash business, but they get half of the purchase price as a deposit before they order the equipment. This not only helps the cash flow, but lets them do a better job of integrating the environment of their customers.
Fourth: Financial Efficiency
While speaking at a conference recently, I met the owner of a DME company in Georgia. He told me of their success in cash sales and good margins from their diabetic supplies and herbs. They chose to promote these products because they are cash sales, don't create accounts receivable, and thereby improve asset turnover. Otherwise said, they don't tie up as much capital per dollar of sales.
You should then offer one final bit of advice for businesses who are in mature industries, by telling how the inventiveness of products slows as an industry moves into the mature stage of its lifecycle. As a result, adding the right new products to the retail mix will require some thought and research. Home Health Products and the trade shows have introduced you to new ideas over the years. So, you might advise them to pay attention to trade publications and to attend trade shows.
By now, your inquisitor is obviously developing ideas that may be appropriate for their business, as evidenced by all the notes on their napkin. Hopefully, you have new ideas too, so you can move on to work on implementation.
This article originally appeared in the November 2001 issue of HME Business.
About the Authors
Vaughan Harshman, PE, is a chemical engineer with more than 20 years experience in the wastewater odor control field. He is currently an odor control sales representative for USFilter, a Siemens company. Vaughan can be reached at (941) 355-2971.
Ronn Schuman is CEO of Connectyx Technologies Corp. Founded in March 2003, Connectyx provides business intelligent software, which incorporates technical excellence, innovation and performance. Visit www.mrnmanager.com.