Business Plan Update

It’s that time of year, and as HME providers review and update business plans, there are a couple of critical points to consider. For each, all involved in this industry should be asking and answering a set of questions that will produce answers as unique as their companies.

Those answers will set the course of business for what may prove to be the most risky period in the history of our industry — the next three years. The risk is heightened by redeployment of competitive bidding, health care reform and the recession, which is essentially becoming a reset of our economic model.

The risks of health reform and the economy are still ill-defined, so the two critical points to consider are aimed at the risk associated with Medicare’s competitive bidding program: What if you win a Medicare bid? And, what if you don’t win a Medicare bid?

It doesn’t matter if your market is in the current or later round of bidding; your business plan should be developed. The only difference is whether your company has less than or more than a year to implement an appropriate plan.

To plan for the contingency of winning a bid, ask and answer the following seven questions:

1. Can we finance growth internally? If winning a bid results in more customers, it is likely you will need additional financing (debt or equity). Profit margins will decline for bid winners, so the ability to finance growth internally will decline. Calculate the sustainable growth rate (based on projected post-contract profit margins, not current profit margins), and compare it to the projected growth rate. If the projected growth rate is faster than the sustainable growth rate, the company will require outside funding.
2. If not, how will we fund the growth? Negotiating new trade terms and trade credit lines could be an option, but there are more. The key is to be sure of the method and use it before the cash is depleted.
3. Can we staff the growth? If your company grows, what new staff will be required? Forecast the positions and the timing of the requirement. Force greater productivity.
4. Can we manage the staff? Who will supervise a larger staff? Where will they come from? How will they be trained?
5. How will we control a larger business? Controls are based in management information systems, which can reveal deviations from the business plan. If a business increases volume at a lower profit margin (which will be the case for bid winners), the controls become much more important. So do the timeliness and accuracy of management responses to any deviations.
6. What are the total costs of growth and price concessions? Some of the costs include training, management information system upgrades, vehicles and equipment. The price concessions should be considered a “fee” for staying in business. How will that fee be recovered?
7. When and how does the company recover those costs and concessions? To say they are unrecoverable is being lazy. Be creative and diligent.

The scenario that no one in our industry wants to address is not winning a bid. The reality is that not winning a bid could be the best thing that happens to some providers, but only for those who develop and successfully execute a business plan that supports the growth of non-competitive product lines sufficient to offset the loss of competitive Medicare business.

For this contingency, ask and answer these five questions:

1. Will our current business strategy be viable? If your company’s business strategy and economic viability is built around serving Medicare beneficiaries, the answer is no. If the business strategy is not built around Medicare, but economic viability is, the answer is no. A “yes” answer requires a strategy built around non-Medicare business and economic viability.
2. What will the impact on cash flow (not profit or sales) be? Don’t confuse cash flow with profit. Use a statement of cash flows as your guide.
3. What staffing adjustments must be made? If 35 percent of your business goes away, it is unlikely that the company can survive without staffing adjustments. Know what they must be in advance so action can be taken quickly. Putting off the agonizing decision may threaten those who would otherwise be able to continue employment.
4. What marketing adjustments will be required? For some, marketing adjustments have already begun. Management must consider what the product/payer opportunities will be after competitive bidding and have a plan to exploit them.
5. What are the comparative costs of adjusting and making price concessions? Is it worthwhile even to bid? It may cost some companies less to abandon the Medicare business than to adjust the business.

On the other hand, as painful as a lower fee schedule will be, it may be less cos than making adjustments to the business. Ask the question, is it necessary to be in the Medicare business?

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Wallace Weeks is founder and president of Weeks Group Inc., a Melbourne, Fla.-based strategy consulting firm. You can reach him at 321/752-4514 or [email protected].