With issues as important as war with Iraq, homeland security, and the coming elections, Senators did not find time to pass a Medicare plan containing competitive bidding for HME before their recess.

But that does not mean providers should feel safe from reimbursement cuts. Last month I explained why, regardless of what Congress does short-term, over the long-term reimbursement reductions are all but certain and what these reductions would mean for the HME industry. (See “Not If, But When” in the October 2002 issue.) This month, let’s discuss the strategies individual providers can implement to ensure their companies will be able to take the powerful blows of national competitive bidding and inherent reasonableness and survive.

Recommendations For Individuals
1. Insulate your company from the actions of payors to the extent that no payor’s actions can cause your company’s sales to fall below the break-even point. Achieving this will allow your company to survive even if it does not win a competitively bid Medicare contract or develops issues with private insurance payors.

All companies should be managed to maintain this insulated position at all times. However, the reality is that more companies achieve the insulation by accident than by design. The nature of the home health care business makes this less likely to occur by accident and more difficult to create by design.

The first step in executing this strategy—which I like to call managing the diversification of payors—is to determine the maximum allowable concentration (MAC) of sales that may come from any payor. The algorithm is:

The second step is to compare your company’s percent revenue by payor to the MAC percentage. Single out each payor that produces a percentage of revenue in excess of the MAC percentage. Then subtract each payor’s percentage of the total sales from the MAC percentage. Divide that percentage by 100 to turn it into a decimal and multiply the total sales by that decimal.

Repeat the calculation for each payor that produces a percentage of revenue in excess of the MAC and then sum the products. This amount equals the sales that must be diluted or eliminated.

Dilution is generally the better choice. Dilute the concentrations by increasing sales from low volume payors while holding the volume steady from the high volume payors. To calculate the sales growth required to dilute the concentrations to safe levels, divide the final sum from step two by the MAC. (Remember, before you divide, you must turn the MAC percentage into a decimal by dividing by 100.)

There are four basic tactics that can dilute the concentration of any one or more payors.

Tactic 1: Acquire more sales from what are currently low volume payors. One way to accomplish this is to match referral sources to payors and products. With this analysis the sales staff can pursue referrals from sources that show the greater exposure to the low volume payors. Marketing can use the analysis to promote the products that are indicated to have stronger ties to the low volume payors and referral sources.

Tactic 2: Expand geographic coverage when there is little opportunity to expand business with low volume payors or when all available payors are near the maximum allowable concentration. Geographic expansion brings risks that must be weighed carefully before committing to it. Once your company has made initial risk assessments and found geographic expansion to be an acceptable risk, you must select new locations based on projected growth rates for expenditures on DME, assessments of the competitors in the new market, gaps that may exist between what a patient and their influencers want/need and what is available, and of course the payors that come with the patients and referral sources.

Tactic 3: Identify and develop one or more niche markets. Seek to identify the niche instead of waiting for it to evolve. Identifying a niche market requires an in-depth analysis of the market, the needs of the persons or companies in the market, and the absence of a solution for a need. Qualify the markets based on growth rate, payor sources, profit potential, and fit with the company. If competition is an issue, it is not a niche market.

Tactic 4: Acquire a company with a payor mix that is nearly opposite the one needing diversification.

2. Position your company to be a successful bidder and maintain the current profit margins. This will, of course, require the reduction of operating costs to a measured and appropriate percent of sales. Calculating the target cost requires assuming the percent reduction in sales that results from a competitive bid or an inherent reasonableness action. For example, assume that all DME lines will be included in a competitive bid and the new price that Medicare will pay will be discounted by 17% from the current allowable charge.

Once that assumption is made, analyze the payor mix to determine what percentage of your company’s sales is attributable to Medicare. Multiply the percentage of Medicare sales times the assumed percentage discount that the bidding will create. Divide each percent by 100 to turn it into a decimal before you multiply. The product of the calculation will be the target cost reduction in dollars. The algorithm is:

There are three tactics beneficial in executing a cost-reduction strategy.

Tactic 1: Reengineer processes. Processes require people to do “things.” A company that does more things or activities typically has a higher payroll than a company that performs fewer activities. So it is the processes that a company performs that drive the payroll cost. If a company wishes to reduce payroll costs per dollar of sales, it must modify the processes that drive the demand for people. This is process reengineering. A perpetual form of process reengineering is known as Activity Based Management. Some of the demonstration suppliers reported using ABC/ABM (Activity Based Costing/Activity Based Management) successfully. One of the textbook targets for ABM is to make 80% of a company’s activities “value added,” or an activity the customer is willing to pay for. This requires understanding what the customer really wants and focusing on delivering only what the customer wishes to pay for.

Tactic 2: Tie employees’ compensation to the bottom line. The saying “you get what you pay for” is true in business. Suppliers that have tied their employee compensation through company-wide bonus plans to financial performance have experienced growth in profits while growing the payroll. Employees who are paid for financial performance, informed of the attendant conditions, and empowered to effect change make more profitable companies. However, because financial incentives can create a motive for billing fraud, a home health care company adopting such an approach must ensure that employees are knowledgeable of compliance issues and held accountable to high standards.

Tactic 3: Employ technologies that remove friction from business processes. There are a surprising number of health care providers (including HME) that lack Internet access and use computers without CD drives and with software last upgraded in 1995.

Furthermore, among these companies a significant portion uses only a fraction of the capability of their antiquated systems. This means there is a huge opportunity to make business smoother for the customer and the provider.

Many company functions can be performed using Internet-based systems that remove time and friction from processes. Technology now supports getting referrals online and combines it with the intake process. Billing can and should be submitted electronically and payors should be allowed to remit payment electronically. E-CMNs can now reduce the time involved with intake and billing. Application service providers (ASPs) make billing software available online so a business never has to install a software update or upgrade. Finally, an increasing number of purchasing processes can be performed online.

3. Reduce customer acquisition costs. First, you must measure the cost of acquiring a referral. The cost per referral equals the cost of sales/marketing staff, advertising, public relations, printed materials, and automobile expense for sales/marketing divided by the number of referrals.

There are four tactics you should consider to reduce your customer acquisition costs.

Tactic 1: Multiply sales power by eliminating nonsales tasks. Sales/marketing representatives need face time with referral sources. Companies that wish to use their sales and marketing dollars efficiently determine what replaces face time with referral sources and eliminate it. Face time may be increased by reassigning nonsales tasks, providing technology to do nonsales tasks more quickly, and providing information to eliminate low sales percentage calls.

Tactic 2: Make it easier to buy from your company than your competitor’s company. This is one of the most basic rules of selling, yet is perhaps one of the most violated. Beware of automated answering systems and other “efficiency” equipment that may delight staff but may frustrate patients and referral sources.

Tactic 3: Differentiate by selling the quantifiable results of the service, not the nebulous “quality service.” If two supplier representatives visit a physician’s office and both claim to deliver the “highest quality service in the market,” one of them is mistaken and the physician’s office staff know it. Second, consider who among referral sources, payors, and patients are qualified to judge good service. Use of measurable results shows that you offer the best service.

Tactic 4: Leverage sales/marketing staff with visibility in the media. Assign someone the responsibility for getting press releases in the newspapers and newsletters every time the company hires a new employee, promotes an employee, or does anything else that can be newsworthy. Provide the media with editorial material by writing articles.

4. Make the cash machine efficient. Much of the discussion above is related to reducing costs, protecting profits, and growing sales. The supplier must not allow these strategies to become an impediment to managing cash flow. Reducing profit margins without a more efficient cash conversion cycle (CCC) is likely to cause cash shortfalls even if the company remains profitable. The cash flow (the change in cash position from one accounting period to another) of an enterprise is a product of profitability and efficiencies in the use of assets and borrowing capacity. CCC management is an excellent technique to manage the efficient use of assets and borrowing capacity.

In short, CCC is the net amount of time in days that an average transaction keeps the company’s cash tied up. The basic objectives in CCC management are to accelerate the turnover in accounts receivable and inventory while slowing the turnover of accounts payable. Or, in other words, to get the CCC number as close to a negative value as possible. To compute CCC, use the following equation.

Days Sales Outstanding + Inventory Days on Hand - Payable Days Outstanding = CCC

Two of the strategies referred to above, insulating the company from the actions of payors and reducing customer acquisitions costs, can be fully developed and executed only by using a good strategic planning system. Each of them calls for sound assessments of the internal and external environments and an effective system to manage execution.

CEOs who are unwilling to dedicate significant effort to make their companies fit for the hard punches ahead should sell now.

Recommendations For the Industry
1. Lobby to remove costs from supplier operations that are imposed by regulations. This may be done while lobbying to maintain reimbursement levels. However, success in maintaining reimbursement levels will be increasingly difficult to achieve and increases will not be realized.

Because the industry is considered a supplier—and it is in the mature life-cycle stage—it is imperative to create an environment that allows the participants to amplify operating efficiencies.¹⁹

The greatest opportunity lies in streamlining the reimbursement process. A significant portion of the operating costs incurred by the business units in the industry lies in the complexities of billing Medicare, dealing with the inefficiencies present in Durable Medical Equipment Regional Carrier (DMERC) operations, and documenting the company’s compliance. Best practices in reimbursement should be studied and a model reimbursement system should be developed. Then strategies to get them adopted should be developed and execution must be driven by the industry.

2. Move forward with the proposal of MED Group president David Miller to unbundle pricing, which really leads to the ability to charge for services. ²⁰ The market sees the industry as a supplier and therefore interprets the prices as excessive. The industry has lobbied for years without success to obtain government recognition of the services it provides. Miller’s proposal will allow the market to reconcile its image with the price paid for supplies and equipment. If the market then wishes to purchase services, it will not confuse their cost with the purchase of supplies and equipment. This dramatic change in the fee schedule would produce the greatest opportunity that a mature industry has had to change its image.

3. Suppliers must participate en masse in the state and national trade associations in order to develop the required political muscle. It must be remembered that HME is a relatively small and fragmented industry comprising about 13,000 companies. Therefore, developing a strong voice requires consistent participation, not just when adversity is on the horizon.

Other Recommendations
Be mindful that excess capacity will be a result of national competitive bidding among unsuccessful bidders. As suppliers leave, or are ejected from the Medicare program, they will seek business from other payors. Collectively, these businesses will represent about one half of the companies in the industry and they may be trying to replace as much as $3.4 billion in sales lost as a result of competitive bidding. This represents 20% of the revenues of the entire industry that will be removed from one half of the participants. It will have at least two effects. One is that it will drive prices down for all cash payors and commercial payors, and thereby drive profit margins down for all suppliers. The second effect is that it will drive some companies out of business. Distribution of sales after competitive bidding could be as unbalanced as is described in Figure 1 below.

Finally, you should consider two more thoughts. First, it will take time to execute the aforementioned strategies and tactics and even more to realize the benefits; therefore these action should be taken immediately. Second, it should be noted that the strategies and tactics presented above have been offered in the context of preparation for national competitive bidding and the reinstatement of inherent reasonableness authority, but their benefit is not limited to the harsh environment that could develop. These strategies and tactics will work well whatever the future may bring.

Wallace Weeks, MBA, is the founder and president of the consulting firm The Weeks Group Inc, Melbourne, Fla. He has developed strategic business plans for the HME industry for the last 10 years. For part I of this article, as well as sources and research methods used to create it, please see the online version at www.hhcdealer.com.