Building the Bottom Line

I recently had the opportunity to visit with an impressive man.

Matt Kneeland is president of Care Medical, headquartered in Visalia, Calif., with seven branches in the state’s central valley. His HME has been in business for 10 years and, as best I can tell, the company has done pretty well. So well, in fact, that its bottom line is improving while reimbursement falls.

Mr. Kneeland was kind enough to share his answers for the following Q&A, which proves that this tough challenge can be accomplished.

Q: Your company has experienced greater profitability during the past two years in spite of declining reimbursements. Without revealing your profit margin, by what factor has profit increased?

A: Three percent (as a percentage of sales).

Q: Was your company already profitable?

A: Yes, we actually were operating with a pretty healthy profit, both cash and accrual.

Q: Did you change your purchasing practices?

A: Not really. It was interesting to see that our [cost of goods sold] actually went up by 2.9 percent of sales during the same period.

Q: Since COGS increased, gross profit margin decreased. Was that because products cost more or because reimbursement declined on products?

A: I feel that due to the cuts we have seen this year in Medicare, coupled with California’s cuts to Medi-Cal, we are seeing less reimbursement per item, which is driving up our COGS as a percentage of income.

Q: So you really improved profit by 5.9 percent, but reimbursement cuts took 2.9 percent back?

A: Yes.

Q: If purchasing practices didn’t contribute to the new profit, what did?

A: After determining which of our product-payer combinations delivered the best profit scenarios, we had the ability to aim our entire organization at those products without sacrificing our clinical services.

Q: How did you determine which product-payer combinations were most profitable?

A: I attended a workshop … where I learned to use activity-based costing to determine each of our product’s individual profitability.

Q: As a result of your findings, did you eliminate product lines or reject payers?

A: Well, because we still desire to be a single resource to our customers, we didn’t so much eliminate products lines as we did limit who we market to and which products are called our “Care Focus Products.” We did have to meet with several hospitals and sever our relationships because almost all of the business we were getting from them was not profitable.

Q: When you severed your relationships with those hospitals, were there any repercussions, like a decline in sales?

A: Obviously, yes, we did see that decline in revenues. We ended up cutting a total of about $35,000 in monthly revenues from those “bad business” referral sources, and to be honest with you, initially I was worried about it. But that was the profit-blind salesperson inside of me who only focused on revenue.

Thanks in part to our growth rate — but to a much larger degree our activity-based costing analysis that determined profit by product — we never saw the cuts affect our top line, let alone our bottom line.

Q: So how did you manage to shift the high-yield product-payer combinations to the high-volume positions?

A: We took our “Care Focus Products” on the road, and had multiple sales and operations staff training [sessions] on these products at each of our locations. We not only taught our employees which products were good referrals, we also taught them which orders were bad orders — and just how much money we lost when taking those orders.

Q: What was the initial response from your sales team?

A: I think the response was quite positive. We tried to maintain our sales representatives’ earning abilities by adding new products to their commissions and changing commissions around to allow them to focus on the new products and make up for any commissions that were downgraded or eliminated.

Q: What have been the most difficult of these changes that your company implemented?

A: Clear communication. When the president of the company comes around and instructs on which are good orders and which are bad, the staff takes that very seriously. You have to make sure that they understand you can still afford to take some of the less profitable orders as long as those are balanced with more profitable orders.

I had one branch that immediately stopped taking all cane orders, and that can put a real damper on your customer service levels. We had to go back through the branches and spread the philosophy that we [wouldn’t] just cherry-pick the good business but that we would be there as a resource to our referral sources as long as we can afford to take the business.

Q: How did these changes impact employees outside of the sales team?

A: I feel that it empowered the rest of the staff. Once the team knows exactly what the profitability is on every item that we sell, it allows them to buy into the company philosophy and keep the company’s interest in mind with each order.

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 [email protected].