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


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

  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.
    This calculation yields your company's DSO.


A/R Aging Averages

  1. 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)

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

  3. 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

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


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

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

  2. 80/20 biller rule: 20 percent of time spent “banging
    keys” doing data entry, and 80 percent of time working

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

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

  • Medicare (electronic claims - ANSI format) at 21 days from

  • Commercial insurance (paper) at 45 days from mailing;

  • Commercial insurance (electronic) at 30 days from submission;

  • Private pay balances at 30 days from mailing.


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

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.


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

  • Manager with average salary of $40,000 to

  • Inside Sales with average salary of $20,000 to

  • 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

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

  • 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);

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

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

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


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

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

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

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

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

*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
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 or
at 310/457-7333.