Double the Profit

Doubling profit is not only achievable, but it is essential for most providers. In fact, some providers will even need to triple their profit. Why? The average profit in the industry is about 7 percent. The effects of the Medicare Modernization Act (MMA) will have removed that by the end of 2005, and it won’t stop there. So, doubling the profit really results in staying even through 2005.

Now, about the claim that it is achievable. There are three arguments to offer: 1) It is being done by independent providers; 2) It only requires about a 10 percent improvement in productivity, and 3) to repeat, it is essential.

A study of one independent provider is particularly encouraging. The company’s story follows, with annual sales and employment figures changed in order to protect confidential information.

The situation begins in the spring of 2004. A company with annual sales of $2,331,788 derives revenue from DME rentals and sales as well as some home IV. With 16 full-time and two part-time employees, or 17 full-time equivalents (FTE), productivity (sales divided by FTE) equals $137,164. The company is moderately profitable, but management recognizes that MMA will eliminate their profit.

First, company management made a firm commitment to improve productivity by 20 percent in 12 months. Achieving this improvement will put an additional $209,861 on the company’s bottom line. It will happen because there will be $164,596 revenue per FTE.

The owner then committed to paying significant bonuses if the target improvement is achieved. So, the company’s employees examined each of its processes with the objective of eliminating the process if possible. If it was not possible to eliminate, they looked at reducing the number of times the activities are performed, and at reducing the amount of time it takes to perform an activity once. In the owner’s words, “We are getting rid of keystrokes, footsteps and time.”

A few of the changes identified include: improving patient information at the point of sale to clarify patient responsibility and thereby reduce collection activity; eliminating order edits that have low value; standardizing inventory around a “formulary;” using the billing software screen for intake rather than transcribing information from a paper form; reconfiguring the billing system to stop progress until required fields are completed in order to eliminate errors; and removing old/unused ICD-9 codes from the billing system.

Another method the company is using to improve productivity is called “sweet spot management,” concentrating on getting new customers who require less activity cost as a percent of reimbursement.

Sweet spot management relies on activity-based costing. The premise is that two payers who reimburse like amounts for the same product may produce different profits after you consider that one payer requires different documentation than another, or a host of other different activities payers may require. Also, two products that yield the same gross profit margin may not provide the same net profit margin.

Using this logic and information allows the company to get the best customer, not the next customer. The company is also growing sales at a fast pace.

From the end of April through October (just six months), this company improved productivity by 16.3 percent, up to $159,576. However, since they have achieved 80 percent of their goal in only 50 percent of the time, they expect to improve their productivity by 25 percent for the year. This will give the owner a $258,750 increase in profit and win bonuses for the employees. This company’s profit has nearly tripled — and will do better.

The fact is that few companies may achieve such a dramatic improvement in such a short period. However, this example makes it easier to accept the notion that productivity improvement of 10 percent in 12 months is achievable.

The owner, managers and employees started with a clear acceptance of the truth, a “can-do” attitude, a firm commitment and a plan they could execute.

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].