Do you know whether your home medical equipment business is being run efficiently and profitably? Without any national statistics, benchmarking is difficult,
by Bruce Brothis and Jack Evans

Do you know whether your home medical equipment 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 HME companies 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.

FINANCIAL BENCHMARKS

Days Sales Outstanding (DSO)

The most efficient way to benchmark your organization
financially 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 mid-to-high 80s.

What DSO represents is 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 (intake, documentation, billing and
collections), and 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:

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.

  • Look at your current TOTAL NET accounts receivable total.

  • Divide your total net A/R by your daily average net revenue.
    This calculation yields your company's DSO.

    Example:

    A/R Aging Averages

    Net Revenue Jan. 1 through July 31, 2008 = $7,525,000

    $7,525,000/182 (number of days from Jan. 1 through July 31) =
    $41,346.15 (daily)

  • Net A/R balance on July 31 = $2,135,000

  • Denial Rates

  • $2,135,000 / $41,346.15 = 51.64 DSO

    Your target should be in the mid-40 to mid-50 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.

    HME is a solid, profitable business to be in when run properly
    but major cash flow can drain when it's not. To quote a popular TV
    ad, “What's in your wallet?”

    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 farther 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 A/R report for a typical HME
    company (if there is such a thing):

    Current 35-40%
    30-60 Days 25-30%
    60-90 Days 15-20%
    90-120 Days 10-15%
    Over 120 Days 5-10%

    Denials are an everyday part of the HME business. Any company
    that says it does not receive denials has spent way too much time
    underwater in that river in Egypt (da Nile).

    There are many factors that contribute to denials, including
    intake accuracy, insurance verification/eligibility and
    documentation, not to mention errors made by the DME MACs. (Yes,
    they do make mistakes.)

    The following shows average denial rates within our industry for
    various types of claims:

    Industry average for all claims = 26%
    Rehab claims (+15%) = 40%
    Oxygen claims (-8%) = 8%
    DME claims (+2%) = 28%

    Claim Processing Errors

    The most recent (12 months ending Sept. 30, 2007) Comprehensive
    Error Rate Testing (CERT) showed the percentage of claims processed
    in error by the DME MACs averaging 8.2%, broken down as
    follows:

    Jurisdiction A 5.9%
    Jurisdiction B 5.3%
    Jurisdiction C 10.0%
    (Palmetto GBA 12.3% and CIGNA
    7.7%)
    Jurisdiction D 11.6%

    OPERATIONAL BENCHMARKS

    There are several operational benchmarks that merit mentioning
    as they have a direct impact on the financial benchmarks. They
    include billing staff vs. 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

    One biller for approximately every $500,000 to $750,000 in
    revenue.

  • 80/20 biller rule: 20 percent of time spent “banging
    keys” doing data entry, and 80 percent of time working
    receivables.

    Both numbers above are directly affected by other duties a
    biller may have, such as customer service, retail responsibilities,
    inventory, etc., as well as the type and volume of items being
    dispensed and billed. For example, a company heavily into rehab
    will produce fewer claims to generate the same dollar volume as a
    mail-order diabetic house.

    Documentation Turnaround

    Documentation such as CMNs, PARs, progress notes and pad scripts
    are the lifeblood of an HME company. How frequently you follow-up
    on your documentation plays directly into your billing, DSO and
    cash flow.

    Small HMEs should follow-up on documentation every two to three
    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 electronic billing and the 837 claim file
    format, you should be submitting a lion's share of your claims
    electronically (especially with the relatively low cost of claims
    clearinghouses). How frequently you submit also rides with the size
    of your organization, but should be no fewer than three times a
    week, preferably daily.

    Also remember that most insurance companies, including the DME
    MACs, have a daily cut-off time. 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 three
    days of DSO if your claims that are submitted on Friday do not hit
    the payer's books until Monday (and that's four days if Monday is a
    holiday).

    Collection Aggression

    How aggressively you work collections and your receivables will
    depend mainly on the payer type. The following 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;
    and

  • Private pay balances at 30 days from mailing.

    RETAIL BENCHMARKS

    One Size Does NOT Fit All

    Yes, most HME businesses do carry much of the same medical
    equipment and supplies. However, their showrooms look very
    different 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 a front-end display of mobility and
    bath safety products for seniors and a front-end display of
    diagnostic/diabetic products, orthopedic supports and compression
    stockings for baby boomers.

    Retail Means Location

    To begin, look at your local demographics to ensure that the
    population will support an HME business.

    Do over half of the families own their own homes instead of
    rent? Are there at least 15 percent seniors or higher? Do the
    majority of adult baby boomers (who are also existing or potential
    family caregivers) have kids in high school or older?

    What is your local population? Cities of more than 300,000 can
    easily support several HME businesses. If you only have 20,000
    people in your immediate town, you will need to draw upon at least
    100,000 to 150,000 residents in the surrounding counties within one
    to one-and-a-half hour's drive.

    Your store signage starts with a curbside marquis that announces
    the HME business. Try to incorporate terms such as
    “Medical” or “Home Care Equipment,”
    “Products,” or “Store” into your name so
    that potential customers know you are selling HME as opposed to
    providing home care nursing services.

    Next, consider easily visible building signage and graphics
    (such as a painted wheelchair, scooter, lift chair or other easily
    recognized medical product) to remind both current and prospective
    customers that medical equipment and supplies are available at your
    location. Front display windows are also a very valuable marketing
    tool to educate your community as to what home health care products
    you stock and sell.

    The average HME business location 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 and
    minimal storeroom/warehouse space.

    For businesses located in prime retail locations where rent is
    at a premium ($4+/sq. ft./month), many of the traditional
    “backdoor” HME functions can be relocated to a less
    expensive commercial/industrial location ($.50-$1/sq. ft./month).
    These include rental equipment storage, clean room, insurance
    staff, pick-up and delivery.

    Sales, Revenue and Profit

    This average single-location HME described above generates $1
    million to $1.5 million annually. Due to the current economic
    recession, sales are down 15 to 20 percent.

    The first year closes by generating $40,000 to $60,000 per
    month, the second year $80,000 to $100,000 per month, and the third
    year $120,000+ per month.

    Saturdays are usually the busiest days, attracting mostly family
    caregivers, and generate between 50 and 65 percent retail cash
    sales. Evening hours from 5 p.m. to 7 p.m. are also very busy for
    family caregivers to shop after work. For retail locations
    averaging 800 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 or 40
    percent, while inexpensive soft goods such as orthopedic supports
    and compression stockings can often generate 100 percent GPM.

    Take note these profit margins reflect HME businesses that are
    no longer 90+ 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).

    The most profitable retail HMEs today generate 60 to 70 percent
    retail, with the remaining revenue reflecting a mix of third-party
    insurance and Medi/Medi reimbursement.

    Another benchmark is the gross sales generated per employee.
    While most industries average $100,000 per employee annually,
    successful HMEs average $140,000 per employee annually because most
    small staffs are highly cross-trained. Highly profitable HMEs
    generate $200,000 per employee annually.

    What do these HMEs net annually? The successful companies, where
    full-time employees average $140,000, net 8 to 12 percent. The
    highly profitable companies, where FTEs average $200,000, net 15 to
    20 percent.

    Staffing

    The successful HME business generating from $1 million to $1.5
    million per year will usually employ from five to seven staff
    members to fill basic functions. These functions and salaries
    include:

    Manager with average salary of $40,000 to
    $60,000/year;

  • Inside Sales with average salary of $20,000 to
    $30,000/year;

  • Outside Sales/Referral Marketing with average salary of
    $30,000 to $40,000 base with 10 percent commission to equal 50
    (minimum) to 100 percent (maximum) increase in total
    compensation;

  • Customer Service Rep with average salary of $20,000 to
    $30,000 without billing and $35,000 to $40,000 with billing
    documentation;

  • Billing with average salary of $15 to $22 per hour,
    depending on experience level, responsibilities and economics of
    the particular market. (This yields $30,000 to $44,000 annually);
    and

  • Warehouse/Delivery Tech with average salary of $20,000 to
    $30,000/year.

    Most start-up operations begin with two or three people,
    basically the owner/manager and warehouse/delivery. The third and
    next addition is usually the CSR/office/insurance person. Everyone
    is forced to cross-train and cover numerous functions at the same
    time, but these operations can still run very efficiently and
    successfully.

    Home health care salespeople are most productive when they are
    offered incentives through commissions and bonuses.

    They are usually paid a minimal base salary and then given a
    commission on all sales that ranges from 3 to 10 percent based upon
    a respective category's profitability. The good salespeople make 50
    percent of their base in commissions, while the excellent
    salespeople double their base salary from commissions.

    Another commission option that is becoming more popular is to
    pay all employees a quarterly bonus of 1 to 3 percent of net
    profits. This greatly helps foster a team spirit for the entire
    staff.*

    Merchandising

    A handful of HME products can be found in most mass market
    outlets today, but never more than one option per product
    category.

    Successful retailers know that the key to their success is
    offering a complete product selection that enables customers to
    make a purchasing decision right then and there. This means
    displaying the minimum of a basic product (i.e., the reimbursable
    entitlement) and at least one upgrade (the better or best
    option).

    Medical equipment is also a “hands-on” business in
    that people do not know what HME products are available and need to
    learn before they can buy. HMEs that display products outside of
    the packaging as samples on their showroom floor help close sales
    by facilitating the purchasing process of
    “touch-try-buy.”

    Inventory turns have greatly improved with the growth of
    distribution and resulting reduction of inventories. Ten years ago,
    the HME market was notorious for only turning inventory 3.5 times
    per year. But today, most profitable HMEs turn inventory at least
    nine or 10 times annually. Soft goods and disposables usually turn
    monthly.

    Benchmarking for Survival

    Without any reference point or matrix for improvement, HME
    businesses that continue “business as usual” will not
    be here in three to five years.

    Any form of benchmarking is vital for survival in this era of
    dwindling reimbursement. Companies must incorporate best practices
    in order to maintain or increase their profitability, be they
    standards from accreditation, ISO, balanced scorecard or simply
    benchmarking.

    *For the results of HomeCare's recent Salary &
    Benefits Survey, including means and medians for both salaried and
    hourly employees, see page 46.

    Bruce Brothis is president of Allegient Billing &
    Consulting Inc., a 13-year-old billing and consulting firm to the
    HME industry. You can reach him at bbrothis@allegientbilling.com
    or at 303/646-9903.

    Jack Evans is president of Global Media Marketing, an HME
    consulting firm specializing in retail sales, layout and
    operations. You can reach him at jevans@retailhomecare.com or
    at 310/457-7333.