If good sales management is to result in profitable sales, then
“bad” sales management is restricting the profit of
many HME providers.
Some providers have realized that all revenue is not equal, and
think they have proven it by analyzing the gross profit margins
from various product-payer combinations, declaring the
highest-yielding combinations as their sales targets. Even though
this is a step in the right direction, it is certainly not enough
— and is potentially fatal.
A look at some actual analyses of product-payer combinations
from HME businesses can be a real eye-opener for those who agree
that good sales management must result in profitable business.
One such company, like many, made oxygen services a primary
sales target. The directive to the marketing team has simply been
“get oxygen referrals.” An analysis of sales according
to product-payer combinations revealed that two payers, Anthem and
United Healthcare, yielded revenue of nearly the same amount:
Anthem paid $131.57 and United paid $134.29.
When the cost of goods data was calculated, the customers with
Anthem were consuming $9.63, compared to $31.17 for United
customers. Activity costs applied to each of the combinations
revealed $66.86 for Anthem, slightly lower than the $68.27 for
United. After subtracting the costs, the net contribution for
oxygen from Anthem was significantly greater at $55.08 than for
United at $34.85.
Some conclusions that can be drawn from this comparison are
that: sales management is acquiring profitable business with
the emphasis on oxygen; gross margin analysis correctly identifies
Anthem as the better payer for the company; United consumes more
time per claim than Anthem; and the most important, revenue
alone is insufficient to declare a sales target.
At another company (part of a health system with its own HMO),
two product-payer combinations that generate significant revenue
per claim are CPAP-HME, at $394.73, and diabetic test strips-BCBS,
at $385.25. The size of these claims can make them attractive sales
targets. The CPAP had a product cost per claim of $32.89, compared
to $79.41 for test strips. Both have attractive gross profit
margins.
When the activity cost is analyzed, the CPAP is found to consume
much more time than the test strips. The activity costs for CPAP
are $183.43, compared to only $37.93 for the test strips. The net
profit contribution for each is still attractive. CPAP yields
$178.41 per claim, but the test strips are awesome at $267.91 per
claim.
In this case, a look at revenue would cause both to be
regarded as essentially equal product-payer combinations, and very
attractive. But if gross margin analysis were applied, it would
falsely elevate the attractiveness of the CPAP business over the
test strip business.
The sales decision that should be made is to allocate more
marketing resources to finding referrals for the test strip
business and to find more payers that will issue a contract like
that of BCBS. Management should also decide to protect the CPAP-HMO
business, but to let it be subordinate to the test strip-BCBS
business.
One final case that demonstrates bad sales management: A
provider using gross margin analysis calculates the company's
CPAP-Medicare business to have a 74 percent gross profit margin,
which is equal to the gross margin of an enteral-hospice contract
and is to receive equal priority in sales.
Further analysis reveals the revenue from CPAP is $129.68 per
claim and enteral is $190.78. The cost of goods are $32.89 and
$49.48 respectively, or 26 percent of the revenue. The big
difference is activity costs. CPAP costs $190.72 per claim compared
to $60.23 for the enteral.
In the end, the CPAP business is losing $93.93 per claim, and
the enteral is making $81.07. The decision to treat these
product-payer combinations equally is a very expensive
mistake.
Finding good sales requires a provider to categorize sales by
product-payer combinations; define desirable sales as those that
produce an adequate net profit; allocate marketing resources
proportionate to the net profit of the product-payer combination;
and find new product-payer combinations that have similar
characteristics to the best currently served.
Wallace Weeks is founder and president of Weeks Group Inc., a
Melbourne, Fla.-based strategy consulting firm. He can be reached
at 321/752-4514 or by e-mail at wweeks@weeksgroup.com.
