Benchmarking HME

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:

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.

Example:

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):

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:

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:

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

1. One biller for approximately every $500,000 to $750,000 in revenue.
2. 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 [email protected] 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 [email protected] or at 310/457-7333.