Terry Luft is president of the Pennsylvania Association of Medical Suppliers (PAMS).

To hear Terry Luft tell it, the worst thing an HME operator can do is pick up his current profit-and-loss statement, skip down to the bottom line, and make business decisions based on that alone—completely ignoring the many useful insights provided on the rest of the page. Luft should know. For a time, that is precisely what he himself did. And the results were not pretty.

Luft is president of Central Medical Equipment Co (CME), a Harrisburg, Pa, HME of 35 employees with annual revenues in the neighborhood of $6 million to $10 million. He started CME in 1981 after leaving a sales position with another Keystone State HME. Life was good in those days. “No capped rental, no managed care, none of the challenges we have now, so getting into the business and making a go of it was easy,” Luft remembers. But, by 1987, CME was struggling, even though the company had been growing at an impressive clip—at least on paper as gauged purely by the bottom line. “All of a sudden, we were late paying our bills and getting more and more behind the eight ball,” says Luft. “My accountant asked me whether I would be willing to consider shutting the place down.”

That was a cold slap in the face, and it took a friendly phone call from Luft’s banker to put him on the right path and avert the demise of CME. “There was a seminar for small businesses my banker wanted me to attend,” says Luft, appreciatively. “It was a how-to course. How to understand a profit-and-loss statement, specifically.”

The seminar presenter stunned Luft and others in attendance by citing figures suggesting that half of all business failures involve companies enjoying record sales. “The explanation was that you can sell yourself right out of business if you are not also collecting on those sales,” Luft says. “His point was that you would be clueless about collections performance unless you studied your balance sheet for information about things like inventory turnover, days outstanding, and assets-to-liabilities. It is the information above the bottom line that tells the story and gives you a clearer picture of your company’s actual health.”

Later, back at the office, Luft and an accounting-savvy clinical employee poured over prior financial statements to see if they could get a handle on the company’s sales vs collections status. They did, and from that were able to take appropriate corrective steps. “The most important thing we did was develop a continual, systematic harmony between our sales and collections processes,” he says. “From that time on, we have always been able to pay our bills on time, put money away, be financially sound, and ensure support from our vendors.”

A guiding principle also emerged. Now, CME makes it a rule to “never buy anything or jump into a new program unless we know ahead of time how we are going to pay for it,” Luft divulges.

Building A Dream
Faithful adherence to that principle enabled CME a short while ago to purchase a parcel on a former corn field and there erect a two-story, 12,000-square-foot custom showroom-warehouse. The company moved in earlier this year. “At a cost of $1.5 million, this was a major investment for us, obviously, but it sends the signal that we are not about to get out of this business any time soon,” says Luft.

It was a vitally important project for other reasons too. Chiefly, it opened the door to an efficiency-enhancing and cost-saving consolidation of CME’s operations. “Over the previous 20 years, as we kept growing, we had to keep adding space, whether by leasing or by buying,” says Luft. “We ended up with our warehouse a block and a half away from the main office. That made life difficult. It created a situation where sometimes the right hand didn’t know what the left hand was doing.”

Moreover, efficiency was slipping as a consequence of conducting business in cramped quarters. “Now everyone has plenty of room in which to do their work,” Luft says, noting that the airy, stylish interiors of the new, brick-faced building have made for a happier, more productive team.

One side of the building overlooks acres of farmland, and big windows top and bottom allow employees and customers to enjoy the panoramic vista. Those windows bring in natural light as well—another source of emotional uplift.

In conjunction with the new building, CME has installed a state-of-the-art computer management system. One of its functions is to track products from order through delivery. The tracking is precise enough that CME can make—and keep—time-specific drop-off appointments. Says Luft, “We don’t want to operate like the cable company where customers are told someone will show up at their door between the hours of 8 and noon or 1 and 5. If we promise to be there at 2, that is when we get there, give or take a few minutes.”

Harrisburg is not CME’s only location. The company also operates a satellite 30 miles south in York, Pa. Like Harrisburg, the York facility is accredited by the Joint Commission on Accreditation of Healthcare Organizations and includes a showroom brimming with products.

Three Key Pieces
Despite last year’s growth rate in excess of 40%, Central Medical Equipment is not the preeminent HME player in the keenly competitive Harrisburg market. However, CME is one of the market’s last locally owned and operated, full-service DME outfits. “We resisted the wave of buyouts that took place a few years ago because of our unshakable faith in this company and its future,” Luft offers.

In the here and now, though, CME bears scant resemblance to its youthful self. “Today we are a threefold operation,” says Luft. “First, we have a respiratory division staffed by respiratory therapists, RNs, and LPNs who—using the full scope of modalities—provide home oxygen and home sleep services.

“Second, we have the division we started with, DME, which remains the foundation of our business,” Luft continues. “This division is rental-based, and through it we provide beds, wheelchairs, walkers, lifts, and more.”

The third component of CME is a rehabilitation division. Those responsible for running that unit include certified rehab technicians who can fluently perform product setups, troubleshooting, and repairs.

Notably, the clinical personnel in all CME divisions are salaried employees. “As employees, I am assured they will be up to speed on the CME way of doing business,” says Luft. “Also, as employees, they develop a strong sense of ownership in the company, which translates into more productivity, more results, and more cohesiveness as a team.”

Speaking of teams, CME, with two other Pennsylvania independent HMEs, not long ago formed a holding company called Dynamic Healthcare Services. Each of the participating enterprises is legally an owned subsidiary of Dynamic Healthcare Services, but remains self-directed and is responsible for its own financials. This arrangement allows the trio of modestly sized companies to present themselves to the world as a single, large provider. “We have been able to land some good managed care contracts we otherwise might not have stood a chance of getting,” says Luft.

However, there is no pooling of revenues. What one makes, one keeps. The only combining that occurs is purely in the technical sense, on the Dynamic Healthcare Services’ balance sheet.

That is not to suggest they do not have functions in common. For instance, there is one business guru, one attorney, and one accountant they each use. And they have instituted their own group-buying organization. Beyond that, the three companies are on their own.

Terry Luft

Of course, Luft and his Dynamic Healthcare Services partners could have adopted a less encumbering framework for union, such as a network. “We did not go that route because we’d had some experience with network arrangements many years earlier,” he says. “Eleven of us banded together to form one, but it did not work well for the reason that the network lacked teeth. We would make decisions affecting all of us, and yet everyone would return home continuing to do their own thing. That defeated the whole purpose, which was to be able to uniformly offer one-stop service across a wide area.”

Hail to the Chief
Luft has added to his responsibilities the presidency of the Pennsylvania Association of Medical Suppliers (PAMS). His 1-year term officially begins this month (July). “PAMS is the oldest association of its kind in the United States,” says Luft, who has served on its board for more than a decade. “It brings together HME companies of all shapes and sizes. It does good work, and that is why I’ve been such a big supporter all these years.”

On his to-do list as president is calling for a serious campaign against Medicare competitive bidding (CB). Luft is convinced that CB will spell hardship for the HME industry—particularly for mom-and-pop shops.

“Smaller outfits aren’t expected to fare well in CB contests against major national companies,” he says. “I’d like to see this new CB requirement go away, period. I say this as a believer in competition and as one who believes that low prices are a by-product of good, healthy competition. But to me, CB is competitive one time only. After that, when you come up to bid again, it is not so competitive.

“Legislators think home health care is a commodity industry where all we do is drop off concentrators and beds,” he continues. “There needs to be an awareness that we do not get paid for all that we do. CB does nothing to promote that awareness. If anything, it does the opposite.”

Back in Harrisburg, Luft will be instituting detailed performance goals for his company. “I used to look at the year ahead and decide, OK, I want to make x-amount more money over the coming 12 months. But I was not establishing any quarterly targets to help me know what I had to do to achieve that desired growth.”

Luft envisions further diversification of CME to properly position the company for change. “I don’t want all our eggs in one basket,” he says. “I learned the hard way about the dangers of taking the narrow view. I don’t care to make that same mistake twice.”

Rich Smith is a contributing writer for Dealer/Provider.