Doubling profit is not only achievable, but it is essential for
most providers. In fact, some providers will even need to triple
their profit. Why? The average profit in the industry is about 7
percent. The effects of the Medicare Modernization Act (MMA) will
have removed that by the end of 2005, and it won't stop there. So,
doubling the profit really results in staying even through
2005.
Now, about the claim that it is achievable. There are three
arguments to offer: 1) It is being done by independent providers;
2) It only requires about a 10 percent improvement in productivity,
and 3) to repeat, it is essential.
A study of one independent provider is particularly encouraging.
The company's story follows, with annual sales and employment
figures changed in order to protect confidential information.
The situation begins in the spring of 2004. A company with
annual sales of $2,331,788 derives revenue from DME rentals and
sales as well as some home IV. With 16 full-time and two part-time
employees, or 17 full-time equivalents (FTE), productivity (sales
divided by FTE) equals $137,164. The company is moderately
profitable, but management recognizes that MMA will eliminate their
profit.
First, company management made a firm commitment to improve
productivity by 20 percent in 12 months. Achieving this improvement
will put an additional $209,861 on the company's bottom line. It
will happen because there will be $164,596 revenue per FTE.
The owner then committed to paying significant bonuses if the
target improvement is achieved. So, the company's employees
examined each of its processes with the objective of eliminating
the process if possible. If it was not possible to eliminate, they
looked at reducing the number of times the activities are
performed, and at reducing the amount of time it takes to perform
an activity once. In the owner's words, “We are getting rid
of keystrokes, footsteps and time.”
A few of the changes identified include: improving patient
information at the point of sale to clarify patient responsibility
and thereby reduce collection activity; eliminating order edits
that have low value; standardizing inventory around a
“formulary;” using the billing software screen for
intake rather than transcribing information from a paper form;
reconfiguring the billing system to stop progress until required
fields are completed in order to eliminate errors; and removing
old/unused ICD-9 codes from the billing system.
Another method the company is using to improve productivity is
called “sweet spot management,” concentrating on
getting new customers who require less activity cost as a percent
of reimbursement.
Sweet spot management relies on activity-based costing. The
premise is that two payers who reimburse like amounts for the same
product may produce different profits after you consider that one
payer requires different documentation than another, or a host of
other different activities payers may require. Also, two products
that yield the same gross profit margin may not provide the same
net profit margin.
Using this logic and information allows the company to get the
best customer, not the next customer. The company is also
growing sales at a fast pace.
From the end of April through October (just six months), this
company improved productivity by 16.3 percent, up to $159,576.
However, since they have achieved 80 percent of their goal in only
50 percent of the time, they expect to improve their productivity
by 25 percent for the year. This will give the owner a $258,750
increase in profit and win bonuses for the employees. This
company's profit has nearly tripled — and will do better.
The fact is that few companies may achieve such a dramatic
improvement in such a short period. However, this example makes it
easier to accept the notion that productivity improvement of 10
percent in 12 months is achievable.
The owner, managers and employees started with a clear
acceptance of the truth, a “can-do” attitude, a firm
commitment and a plan they could execute.
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.
