Benchmarking Your Business for Now and for Later

When it comes to your home medical equipment business, do you want to be a dinosaur or a dynamo?If you chose the latter — and you likely did if you’re intent on staying in the business — it’s time to do some benchmarking to make some critical assessments and comparisons about your business to be sure you’re on the dynamo track.

If you don’t, warn three longtime HME consultants, you could quickly find out that you’re going the way of the stegosaurus.

“The bottom line is that by knowing industry benchmarks, [HME providers] can see whether they are operating smart and profitably or if there is room for improvement,” says Jack Evans, president of Malibu, Calif.-based Global Media Marketing.

But in an industry where there is a dearth of national statistics, benchmarks aren’t so easy to come by. Evans, along with Wallace Weeks, founder and president of Melbourne, Fla.-based Weeks Group, and Bruce Brothis, education services director and senior consultant for Alternative Billing Solutions, Bloomington, Minn., recognized that.

But they also knew that their years of working with providers — ranging in location from rural to urban and in type from mom-and-pops to national chains — made them privy to trends and numbers that could help other providers benchmark their HME operations.

The three will present their findings at Medtrade in Atlanta during an Oct. 19 seminar sponsored by HomeCare. From operations and staffing to profit margin and merchandising, following is a preview of some key information from the upcoming session.

Financial/Operational Benchmarking

There are numerous ways to benchmark your company financially, according to Brothis, including days sales outstanding, denial rates and even accounts receivable aging averages.

• Days Sales Outstanding — “The most efficient way to benchmark your organization financially against the industry is to compare your DSO to the national average,” says Brothis. “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.” The industry average for DSO hovers “around the high 80s,” according to Brothis. The target, however, should be the mid-40s, he says. How do you know your DSO? Here’s Brothis’ formula:
  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 daily revenue figure. (Example: Revenue for 1/1/2005 through 6/30/2005 = $7,525,000; $7,525,000 divided by 181 (the number of days in that period) = $41,574.59 daily.)
  2. Look at your current net accounts receivable total. (Example: Net A/R balance on 6/30/2005 = $2,335,000).
  3. Divide your total net A/R by your daily average net revenue. That figure is your DSO. (Example: $2,335,000 divided by $41,574.59 = 56.17 DSO.)
  4. A/R Aging Averages — How many of your aged accounts receivables are in the “over 120 days” column? If the figure is more than 10 percent, you should take a look at how you’re managing A/R, according to Brothis. Here are the targets you should try to hit:
  5. Denial Rates — Denials are commonplace in the HME industry. In fact, says Brothis, an average of 26 percent of all claims submitted are denied. That figure changes according to what the claim is for, he explains. For example, denials for rehab equipment run about 40 percent, for oxygen about 18 percent, and for durable medical equipment about 28 percent. Intake accuracy, documentation, insurance verification and eligibility all play a role in whether a claim is accepted or denied, but so do errors made by the four durable medical equipment regional carriers. Overall, Brothis says, a Comprehensive Error Rate Testing report showed about 10.5 percent of all claims were denied or short-paid by the DMERCs. Here are the results shown by region:
  6. Billing Staff vs. Revenue — Ever wonder how many billers you need? Brothis suggests that, on average, HME companies need one biller for every $600,000 in revenue. About 20 percent of the biller’s time should be spent doing data entry, while the other 80 percent should be spent handling receivables. Brothis points out, however, that the number could differ based on the individual makeup of the business. And, he says, “both numbers are directly affected by other duties a biller may have, such as customer service, retail responsibilities, inventory, etc.”
  7. Claims Submission Timing — How often you submit claims depends a lot on your company’s size, Brothis says, but you shouldn’t file any fewer than three times a week. Ideally, he says, you should file daily. That would result in smoother cash flow and more frequent billing of recurring rentals, he says.

Retail/Marketing Benchmarking

From a retail standpoint, it’s tough to find useful benchmarks by which to compare your retail operation. Medical conditions and health care needs vary from population to population. Each community has its own demographics, and even though many HMEs carry much of the same equipment, seniors and baby boomers may buy completely different models of the same products.

“We are not selling Big Macs,” Evans says wryly.

Still, he notes there are several standards that can help to assess where your retail business stands:

• Retail Location — Most retail operations are located in high-traffic areas where about 10,000 cars pass each day. They average between 2,500 and 3,000 square feet, with showroom area taking up roughly half that space. And they feature exterior signage — a wheelchair, scooter or lift chair, for example — and window displays “that sell 24/7,” Evans says.
• Showrooms — HME showrooms generally average between 1,200 and 1,500 square feet, plus a customer service desk, fitting rooms, restrooms, back offices and storeroom/warehouse space, Evans says. In general, most retail operations generate $60,000 to $80,000 in sales per month during the first year of operation; $100,000 to $120,000 per month the second year; and $150,000-plus per month the third year. “Gross profit margin is “an important indicator of profitability,” Evans says, noting that the GPM averages 45 percent for profitable HME businesses. And, he adds, such providers are dependent upon Medicare/Medicaid for only about a third of their business. As in the rest of the retail world, Saturdays are the busiest days, and evening hours generate a great deal of business, too, he says. “For locations averaging 1,000 transactions per month, more than half occur during these periods,” Evans notes.
• Staffing — If you’re a successful HME retailer, you’re likely generating between $1.5 million and $2 million a year. You have seven staff members, including a manager and employees for inside sales, outside sales (referral marketing), customer service, billing, office/register/phone and warehouse/delivery. The gross sales generated per employee average $110,000 annually for successful retailers; if you’re very successful, Evans says, that figure tops $140,000 per year.
• Advertising and Marketing — Chances are, you advertise your store if you’re a successful HME retailer. But how much do you spend on marketing — and how much should you be spending? “A good rule-of-thumb is 5 percent of gross sales,” Evans says.

Where should that 5 percent go? Here’s what Evans suggests for an advertising budget for an HME firm generating $1 million in gross sales (5 percent of $1 million = $50,000):

Remember, says Evans, that “the goal in retail is to maximize sales-per-customer, margins and, therefore, net profits.” To do that, he says, you must know what your most profitable product is — and strive to sell more.

Getting the Most from Benchmarking

Just as golfers benchmark to “par” and people who are managing their weight benchmark to calories per day, HME providers need to find industry key points for benchmarking, according to Weeks.

To reap the most benefit from the effort put into benchmarking, Weeks says, there are five things providers must do:

1. Select the right benchmark “There are three sources of benchmarks — internal, competitive and universal; and two types of benchmarks — best practice and norm,” Weeks explains. Internal benchmarking involves looking within a company and is best used when a company is “either producing the best result in the industry or when its results are far below the norm.” Competitive benchmarks, generally the most useful, are those most often referred to and are derived from studies of the industry. Universal benchmarking is a comparison to other industries. “Best practice” is the best quantifiable result from the source, while “norm” refers to the average for the source. Weeks suggests that companies compare to the best practice. “The challenge is finding the best practice among the competitive and universal sources,” he says.
2. Benchmark all that is important If a product or effort does not account for 5 percent of revenue, expenses or man-hours, it is not important, Weeks says. Instead, you might benchmark the 20 percent of your business that accounts for 80 percent of your revenue. For example, Weeks says, “it is common to find eight or nine payers that account for 80 percent of a home care company’s revenues, and the same number of product lines.” Benchmark those for a true picture of how your company stacks up.
3. Benchmark both throughput and quality Weeks defines “throughput” as the output per time, i.e., deliveries per day or intake per hour. “Quality,” he says, “is meeting the expectation of the customer, whether the customer is internal or external.” A provider can measure throughput of billing and collecting as DSO, which can be lowered to achieve a target by writing off accounts receivable. In other words, “increasing throughput in any process can usually be accomplished by lowering quality; increasing quality in any process usually results in lower throughput.” The most efficient processes balance both, Weeks explains.
4. Select the right frequency of benchmarking How often should you undertake benchmarking? Weeks suggests that the frequency depends on the rate of change in the company. Some benchmarks need to be updated monthly, others quarterly or annually. If your company is growing at a rate of 30 percent a year, you will likely need to measure some items more frequently than a company growing at 6 percent a year.
5. Remember that benchmarks are not static The HME industry being what it is — highly changeable — companies need to revisit the benchmark at least annually, Weeks says. “In our industry, we can expect the norms to be changing rapidly for the next few years,” he notes. This means that while normal productivity — the revenue per full-time equivalent employee — has recently been reported at $118,000, companies who work with this norm will suffer because reimbursement rates are not rising.

Further, he says, the norm will improve as providers respond to the new HME environment. Weeks points out that he has seen some companies increase productivity by as much as 25 to 30 percent over the past year in response to current conditions.

What’s more, he cautions, “When an environment is changing dramatically and rapidly, it is probably best to consider the current industry norm to be the worst acceptable performance.”

Bruce Brothis is education services director and senior consultant for Alternative Billing Solutions, an HME billing and consulting firm in Bloomington, Minn. He can be reached at 303/646-9600 or at [email protected]. Jack Evans is president of Global Media Marketing, Malibu, Calif., and specializes in HME retail sales, showroom design and merchandising, and marketing and advertising. He can be reached at 310/457-7333 or at www.retailhomecare.com. Wallace Weeks is president of Weeks Group, a Melbourne, Fla.-based strategy consulting firm. He can be reached at 321/752-4514 or at [email protected].

Benchmarking for the Future

As you are benchmarking your current HME operation, it’s wise to do so with an eye on the future, say three industry consultants. The industry is a volatile one, and players already know that competitive bidding and mandatory accreditation loom, that reimbursement continues to shrink, that consolidation continues to grow and the Centers for Medicare and Medicaid Services continues to change the rules.

If providers want to continue in the business, they, too, will have to change.

“The severe effects of the Medicare Modernization Act on home health care will cause providers, manufacturers and distributors to be making adjustments until 2010,” predicts Wallace Weeks of Weeks Group.

One of those adjustments could be changing your payer base.

“The HME [providers] that are still 95 percent Medicare/Medicaid are dinosaurs that will not be around five years from now,” contends Jack Evans, Global Media Marketing.

Diversification is the key, he says. “[HME providers] cannot remain simply providers [where] a third party pays for the product, but they must transform into businesses in which they sell products to other businesses and customers,” Evans says.

Bruce Brothis of Alternative Billing Solutions notes that providers’ margins have been shrinking and will continue to do so with the advent of competitive bidding and decreases in allowables. And that’s not only Medicare/Medicaid. “Many private insurers mimic Medicare allowables,” he says. Providers should look at co-insurance, which is gross profit, he says.

Evans says that even now, successful HME providers are seeking to shrink their dependency on governmental reimbursement. Currently, he says, the revenue sources for profitable HME providers break down this way: one-third Medicare/Medicaid, one-third private insurance and one-third retail (cash, check or credit card).

Governmental dependency could — and perhaps should — continue to lessen for successful providers, these experts say.