Making Your Medical Supply Business Profitable

The first-month sales at a new retail home medical equipment business in Walnut Creek, Calif., were $20,000. Another new retail HME location in Lynchburg, Va., sold $1,400 one of the first days it was open. These are impressive results for retail-only stores that are not Medicare Part B providers. I waited on one customer at the California store who wanted to buy a scooter, lift chair and stair glide. (Read more about Allstar Medical Supply in Walnut Creek, Calif., in “Diary of a Retail HME Start-Up.”)

How did these retailers make their medical supply business profitable? Why are these new retail HME stores successful? What do they do or offer that is different from traditional HMEs? What can you do differently to capture some of these profitable retail sales? Read on to find out how you can diversify successfully into retail HME.

Four Common Actions of Successful HME Retailers

1. Reduce or eliminate Medicare. These traditional HME providers have had enough aggravation from Medicare, whether the issue is competitive bidding, the PECOS, ZPIC audits or denied claims. They have diversified their revenue stream and either completely eliminated or reduced Medicare to less than 30 percent of their total revenue. The end result is that the ongoing reimbursement cuts and added regulations may affect their bottom line — but they won’t be out of business.
    
2. Stretch your comfort zone. By trying a completely different business model, these HME companies are becoming boutique retailers that happen to sell home medical equipment. HMEs that attempt retailing usually do not have the appropriate location, staffing, product mix or advertising program to be successful.
    
3. Delegate. Successful veteran HME owners and managers are very knowledgeable and capable business leaders. However, when they shift to retail, they delegate the daily operations to retail veterans who are equally competent in their own respective business model.
    
4. Think big, as in multiple locations. Hub-and-spoke business models are the most efficient and profitable in retail. Using their traditional HME as the hub, many retailers open multiple retail locations around the hub to control an entire sales or geographic territory.

Transitioning to Retail

Traditional HME businesses are not equipped to transition into retail without making the following major changes:

• Location, Location, Location. Traditional HME businesses may be hidden in commercial areas or industrial parks where they pay warehouse rental rates. Retail businesses strive for high visibility and easy accessibility. Retail locations for HMEs vary, but usually center around strip malls, shopping centers, medical office buildings and hospital lobbies.
   
• Capturing 80% of Sales. There is no “one-size-fits-all” for home health care product selection, and this is why most retail HME chains have failed. In retail, the front third of the store generates 80 percent of sales. An HME retailer must match demographics and local HME needs with product selection. For example, a senior community would buy patient room, bath safety, incontinence and wound care products. People in a baby boomer community and family caregivers would buy diagnostic and diabetes products, foot care products, orthopedic supports and compression hosiery.
   
• No Chrome! Chrome canes, crutches, walkers, transport chairs and wheelchairs are Medicare-reimbursable items. In retail HME, these products do not belong on the showroom floor. HME retailers display colored aluminum as upgraded — and more expensive — products that sell for cash. Why take up valuable showroom display space on reimbursable products that net minimal profit?
   
• Qualify First. When a salesperson immediately asks a new customer what insurance they carry, he is limiting the sale to the least expensive and least profitable reimbursable product. Qualify customers first by determining who the end-user is, and find out about their medical issue or condition. Then the salesperson can demonstrate all of the core and related home health care products that meet this health care need.
   
• Sell High. Start showing customers the most expensive, fully loaded product, and then work your way down to the basic reimbursable product. Car salespeople are notorious for pushing top-of-the-line, fully loaded vehicles on customers. But even with cars, consumers usually don’t buy the most or least expensive models but purchase somewhere in the middle. The same holds true for home health care products.

Give customers a choice, starting with the best and working your way down to the basic, and you will find that two-thirds to three-fourths opt for an upgraded product.

• Multiple Products per Sale. Traditional HMEs that are 80-plus percent Medicare/Medicaid still average one product per sales transaction; they are simply processing these prescriptions for reimbursable products. In contrast, profitable retail HMEs today average two to three products per customer. After qualifying the customer and selling high, they not only provide the Medi/Medi product but also sell an upgraded version as well as related, add-on products.
   
• Product Mix. Traditional HMEs simply stock one SKU per product category. But as a retailer, if you do not offer feature and price options, customers will leave your store and shop the competition in order to compare and then make a purchasing decision. Retail businesses usually display a good-better-best product offering in order to give consumers choice — and close sales in their store. Retail HMEs display at least a basic model and one upgraded model for most core products.
   
• Windows Sell. Your windows are silent salespeople that sell 24/7 for you. Traditional HMEs store rental wheelchairs and beds along their front windows. Retail HMEs use risers and halogen track lighting to make products visible from the parking lot/street day and night. They display big-ticket cash products such as lift chairs, scooters, transport chairs and rollators, and rotate these products on a monthly basis from window to window to maintain the interest of people walking and driving by.
   
• Room Sets Bundle Sales. No one needs only one grab bar. By displaying all of the bath safety products on the floor, including a tub and commode with all of the related bath safety equipment, retail HMEs visually educate their customers. By displaying all of the products that someone will need at home to be independent in the bathroom, they sell a package rather than a single product.
  The same holds true for the bedroom. In your patient room display, add on everything someone might need at home: sheets, chucks, memory foam overlay, wedges, cervical pillows, reachers, bedpan, urinal, skin care, bed rails with backpacks and/or grab bars, over-bed table and bedside commode.
   
• Show More, Sell More. Strange as it may sound, the more you display of any given product category, the more you will sell. Whether you are selling wheelchairs, rollators, beds, lift chairs, CPAPs or orthopedic supports, it doesn’t matter what the product is as long as you create a destination in that respective category. Feature all of the product models with every option, and you are making a visual statement to your customers that you are the experts and community resource for that category.
   
• New Referral Sources. In traditional HMEs, the key referral sources are discharge planners, case managers and physicians. But in retail HMEs, the referral base changes in relation to individual cash sales. The prime referral sources become chain pharmacists and independent and assisted living centers.

Profitable Retail HME by the Numbers

The traditional benchmarks for HME are tied to Medicare diagnosis related groups (DRGs) and hospital utilization. But these fail to account for retail cash sales in HME locations, pharmacies, drug chains, mass merchandisers and online.

For over 20 years, fellow consultant Bruce Brothis and I have collected operational numbers from accounts we visit in our weekly travels. Following are “Best Practices” benchmarks for retail HME:

• Showroom. The average retail showroom size is 1,500 sq. ft. This equates to a 2,000- to 2,500-sq. ft. space that also includes a small (i.e. 400 sq. ft.) storeroom/lunchroom, fitting room, bathroom and optional manager’s office. Average cost for this retail space in our recession is $2/sq. ft. per month, or $24/sq. ft. per year.
   
• Sales. Gross sales per sq. ft. have dropped during the recession from $1,000/sq. ft. per year to $800/sq. ft per year. Multiply your showroom’s square footage times this number to determine your expected annual gross sales. (Note: these numbers reflect retail HMEs that incorporate Medicare/Medicaid coverage either at this retail location or through their original DME “hub” location. For independent retail-only HMEs, the gross sales numbers average from two-thirds to half this amount due to the respective number of Medicare/Medicaid customers who are turned away.)
  
  Usually new retail HMEs break even between the 10th and 12th month. First-year sales gross between $500,000 and $600,000, while second-year sales usually break $1 million.
   
• Profits. Retail HME businesses average 45 percent gross profit margin (GPM), which translates into 55 percent cost-of-goods sold (COGS). Some of the leaner, more profitable operations average 47 to 50 percent GPM. Net profits average from 8 to 12 percent, while the more efficient HMEs (i.e. paperless) average 15 percent or higher.
   
• Revenue Mix. The average revenue mix of a profitable retail HME is from 30 to 45 percent Medicare/Medicaid, 25 to 50 percent cash and 20 to 35 percent private pay/third-party insurance. A profitable retail HME business that is also a Part B provider remains under 40 percent Medi/Medi. But a growing number of retail-only HME businesses today are 100 percent cash, and their annual sales are growing to keep on par with the full-service retail HMEs.
   
• Staffing. Another benchmark of a profitable retail HME is the gross sales generated per employee. While most industries average $100,000 per employee annually, successful retail HMEs average $140,000 per employee annually because most small staffs are highly cross-trained.
   
• Commission or Bonus. All salespeople are more 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. Good salespeople make 50 percent of their base in commissions, while excellent salespeople double their base salary from commissions.

But in retail HMEs, every sale depends upon most of the “front-line” employees — everyone who touches the customer. A team bonus has become the most popular option, in which all employees receive a quarterly bonus of 2 to 3 percent of gross profits. This helps foster a team spirit for the entire staff.

A commission for multiple-product sales also works extremely well to increase sales-per-customer and profitability. For each customer transaction with two products, a 3- to 5- percent or 5- to 7-percent commission is paid; for each transaction with three products, a 5- to 7-percent or 7- to 10-percent commission is paid. These commissions are usually correlated to each product category’s respective profit margins.

Retail HME Location Features

• Customer visibility and accessibility
• Store signs that are visible from the street
• The words “medical equipment,” “home care products” or some other variation of HME in large, easy-to-read letters included on signs
• HME paintings, drawings, photographs or window film on the front of the building so potential customers know instantly what products are sold
• Enough parking spaces reserved for customers
• One or two disabled parking spaces adjacent to the front or rear door
• Double or automatic front doors to allow easy access

Jack Evans is president of Malibu, Calif.-based Global Media Marketing, an HME consulting firm specializing in retail sales, layout and operations. You can reach him at [email protected] or 310/457-7333.

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Retail Rollator ROI

No. on the floor = Turns/month

1-2 displayed = 1/mo.
2-3 displayed = 3/mo.
5-6 displayed = 6/mo.
10-12 displayed = 12/mo.

Profitability/ft.

1 = 4 sq. ft.
Cost = $79
Retail = $149
Gross profit = $70
Rent = $40
Net = $30

Fully Loaded

Gross profit = $150
Net = $110