According to the most recent business performance survey sponsored by the American Association for Homecare (AAHomecare), accounts-receivable days for home care companies have been declining since 2001. The trend suggests that dealers and providers are becoming financially healthier and better positioned to grow despite new regulatory and reimbursement-related challenges. “In 2003, the last year for which data are available, we saw accounts receivable at an average of 74 days. In 2002, they averaged 83 days,” says survey director William L. Cron, DBA, an M. J. Neeley School of Business professor at Texas Christian University in Fort Worth. “That is an unusually steep 1-year drop, so when the new numbers are available later this year, we may see accounts-receivable days back up around, perhaps, 79 days. Even so, that is still an improvement over the 2001 rate of 85 days.”

Professor William L. Cron, DBA

The explanation for faster payment of money in 2003, Cron believes, is that companies simply did a better job of compiling, submitting, and following up on claims. “They established claims procedures that were more effective and made use of information technology that was more efficient,” he says. “As a result, they sent in claims that were cleaner and then were able to keep a tighter rein on them through the payment cycle.”

Shortened industry-wide accounts-receivable days is good news because it signals that many individual companies are experiencing improved cash-flow situations, explains Cron. “When money is less tied up in receivables, it is available for use in the support of inventory and to pay for marketing efforts,” he says.

It is unknown whether surveyed companies were also using their freed-up funds to expand their product mixes. “That is not a question we asked,” Cron confesses.

Cron-Logical Order
In 2004, some 114 companies responsible for generating $2.7 billion in revenues during the previous year participated in Alexandria, Va-based AAHomecare’s Financial Performance Survey. Among those firms, the median annual income was $5 million (according to Cron, two thirds of all US home care companies have sales of $3 million or less, suggesting that his sampling skews toward companies larger and more successful than most).

The survey reports findings among four categories of companies: those that derive more than 50% of their sales from HME; those that ring up more than half from respiratory; those making the majority of their money from home infusion; and those with a more generalized business mix but that are specialized by geography.

Participants supply key financial data about their enterprises as part of the survey process. Additionally collected are data about certain operating expenses, which include number of employees, asset-management practices with regard to accounts receivable, and, to a limited extent, compensation. “Also, for the last 3 years, we have had special topics that we focus on,” says Cron. “In this last survey, we collected information about activity-based management, and sampled the companies on how they intend to respond to Medicare’s oxygen reimbursement cuts and new requirement for competitive bidding. The year before we asked about their practices concerning sleep disorders.”

The first AAHomecare survey was conducted in 2000, the same year the organization formed by merging the Health Industry Distributors Association, the Home Health Services and Staff Association, and the National Association for Medical Equipment Services. Originally, AAHomecare questionnaires were mailed to all members. Today, the questionnaire is posted at AAHomecare’s Web site, where it is then accessed by those who wish to participate (members receive an e-mail from AAHomecare announcing that posting, which usually occurs at the end of March or beginning of April). Members print off their downloaded copy of the questionnaire, write in their answers, and then mail the completed forms to Cron—the deadline is June 1 or thereabouts. Analysis of the survey data is disseminated to AAHomecare members and others in early September.

Of the companies that respond to the survey, 95% of them do so of their own accord; the remainder require follow-up contact from Cron and AAHomecare volunteers. As many as 80% of the companies that participate one year are apt to do so again the next, indicates Cron, who, in his day job, teaches marketing strategies to MBA candidates and engages in research on the impact that good (and bad) marketing decisions and sales management practices have on company profitability and overall financial status.

Cron is a veteran of this type of survey work, having played a role in or overseen their production since his days as a doctoral candidate at Indiana University back in the early 1990s when a professor of his on retainer asked him to help compile an annual snapshot of member performance.

Surprises
In his AAHomecare surveys, Cron routinely measures the sustainability of respondents’ growth rates. “In our industry, the growth rate for 2003 was 10%,” he says. “It is an oversimplification to put it in these terms, but a company can really grow only as fast as its return on equities, minus any kind of dividends or other investor payouts. Home care companies’ return on equity as revealed in this latest survey is such that the 10% growth rate is clearly supportable—and has the capacity to support more on top of that. That is encouraging for AAHomecare members because it places them generally in a strong position to qualify for growth-oriented financing.”

Noteworthy too from the most recently available survey: optimism about the possible effects of Medicare’s new competitive-bidding rules seems to abound. According to Cron, just 3% responded “very likely” to a question asking whether a sell-off of their company and a departure from the home health arena were in the cards ahead of competitive bidding’s arrival (8% answered “unsure” while 89% said it is unlikely they would get out). “The overwhelming majority of our companies felt they could win, even with the constraints of competitive bidding imposed on them,” says Cron, adding that this contradicts conventional wisdom’s expectation of two thirds of home care providers vamoosing as a result of the new purchasing procedures. “To be fair, about 75% of the firms saying they won’t be going away are Medicare-certified, so perhaps they are more sophisticated about working the Medicare system, which could in part explain their confidence despite all we have heard about competitive bidding.

“Mainly, however, the source of their confidence seems to be that they have gained the ability to manage their costs to fit within the margins Medicare’s new rules will impose.”

Indeed, for Cron, a big surprise uncovered by the 2004 survey was evidence that companies are aggressively seeking to manage the costs associated with their activities of daily business—everything from making deliveries to running a customer-service department. “Sixteen percent of respondents had undertaken activity-based costing in 2003 or prior,” says Cron. “Looking just at deliveries, we found the fourth lowest cost of that activity among them was $11.17, while the fourth highest was $40.08. For customer service, the fourth lowest cost was $3.61; the fourth highest was $13.76.

“What these variances tell me is there is a tremendous opportunity for most companies to drive down their costs by reconsidering the way they perform their key activities.”

Clouds Gathering
On the basis of what the 2004 survey reveals, Cron thinks home care dealers and providers ought now to be stepping up their cost-control and asset-management efforts. “For small companies in particular, their best hope for meeting the challenges of the years ahead is to run their operations with a higher level of business-mindedness,” he says. “But many will find it difficult to do that. One of the beautiful things about the home care industry—as is true of all of health care—is it tends to attract as leaders of companies compassionate, caring people who are clinicians first and foremost. Unfortunately, that admirable trait tends to interfere with doing things in ways that make true business sense. For example, you will visit a patient in the home to deliver care, but one visit too many can spell the difference between profit and loss—if you are of a clinician mind-set, you might not hesitate to provide that one visit too many.”

Questionnaires delving into company performance during 2004 will not be completed, returned, and tabulated for several months yet. So it is anybody’s guess what the data will show, but Cron ventures that they will reveal companies enjoyed profits at least on par with 2003’s yields. “The impact of oxygen reimbursement won’t be significantly felt in their 2004 financials, because there has not been enough time for that,” he says. “And there was nothing else of an earth-shattering nature to come along that would have upset the applecart to any large extent.”

Gazing deeper into his crystal ball, Cron predicts 3 to 5 years out there will be fewer home care providers than now exist, even though amazing strides in technology could all but guarantee the patient’s domicile will be the setting where many of today’s low- to medium-intensity hospital-based services will be delivered—including diagnostic imaging. “Smaller, cheaper, better technology should instead lead to the creation of more home care companies, not less,” he says. “There will be more opportunity for home care, for one. But, for another, improved technology will help erase the economy-of-scale advantages held by larger companies, so the small ones should have less trouble competing.

“I think the reason there instead could be fewer home care companies is that one consequence of the new Medicare rules and rates will be a raising of the bar, which will make it harder for all companies—large and small—to compete unless they are very, very efficient managers of their costs.”

Profitability could decline as well, he speculates. “I see it falling back by 20% to 25% in response to increased governmental regulation,” Cron offers. “The better-run companies in this industry will be able to handle this level of profit decline, while many will not. It is definitely possible to thrive even with this sort of anticipated profit decline, but it will be a much tougher environment in which to make an acceptable level of profits.”

Rich Smith is a contributing writer for Dealer/Provider.