Home care companies that invested in systems and procedures for better managing their business operations were rewarded during 2004 with greater cash solvency, improved profits, and a stronger marketplace position, so finds the American Association for Homecare (AAHomecare) in its latest financial performance survey. Moreover, firms that engaged in activities-based management—meaning they used technologies and processes to rein in their operations costs—saw their accounts receivable collection cycles shrink by 5 days, from 74 in 2003 to 69 last year.

All of this is heartening to the man responsible for conducting the annual AAHomecare survey—William L. Cron, DBA, an M. J. Neeley School of Business professor and MBA program academic director at Texas Christian University in Fort Worth (Cron’s AAHomecare surveys began in 2000, but he has been taking the pulse of this and other industries on a regular basis since 1978) .

William L. Cron, DBA

Home Health Care Dealer/Provider magazine invited Cron to discuss the recently released 2004 survey results. During our conversation, Cron confessed to being surprised—pleasantly so—by the gains revealed in the survey, and indicated he may need to alter at least one long-held assumption about the pecking order of success within the home care industry.

Dealer/Provider: In 2003, the AAHomecare survey reported that accounts receivables averaged 74 days, whereas the year prior it was 83 days. You felt this was an unusually steep decline and as such was very likely an anomaly. And therefore in 2004 the days would be slightly higher—although still below 2002 levels. Now you tell us accounts receivable days dropped again. What happened?

Cron: I was surprised by that. I was reasonably sure the days would bounce back up to around 79. Instead, they declined an additional 5 days. If you look at where accounts receivable days were in 2001—85 days—that is a remarkable and very positive trend.

Dealer/Provider: To what do you attribute this uninterrupted improvement?

Cron: Home care companies once again did a better job of compiling, submitting, and following up on their claims. In particular, they have become more savvy about Medicare first-denials, thanks to their use of tracking services that provide benchmarking data. When you are able to determine that Medicare is denying, say, 30% of your claims and Medicare is 40% of your business, you know you have got a significant problem that you are going to need to deal with or else be eaten up by the costs of resubmitting those claims and by the costs resulting from delays in collecting on them. Tracking services also are providing these companies with insights as to the reasons why their claims are rejected and how frequently each type of mistake in filing is made. These benchmarks enabled companies in 2004 to know where they stand, gain a sense of what is realistically achievable, and to then take appropriate corrective action.

Dealer/Provider: So the information technology that companies are using seems to be working?

Cron: Correct. In fact, without the help of sophisticated information technology, it would be impossible to have this type of benchmarking and analysis.

Dealer/Provider: Shortened industry-wide accounts receivable days is good news because it signals that many individual companies are experiencing improved cash-flow situations, which in turn should make them more attractive risks to money lenders, true?

Cron: Very true. And, with privately held companies like these, cash flow is more important than profits.

Dealer/Provider: Why is that?

Cron: Well, take the average-size firm we surveyed. The reduction in its accounts receivable days means that, compared to how it operated 2 years earlier, this company freed up approximately $250,000. That quarter of a million dollars was available for investment in more productive activities and productivity-enhancing technologies.

Dealer/Provider: Wouldn’t a profitable company likewise have cash available for investment?

Cron: Not necessarily. It is entirely possible to be a profitable company yet have all your cash tied up in inventory or receivables. That is why lenders look more favorably at companies that have a good cash-flow situation first, profitability second.

Dealer/Provider: The surveyed companies in 2004 seemed to have it both ways—cash flush and profitable.

Cron: They did indeed. Profits were up significantly—at a level we have not seen since 1997 or 1998. But it’s not because providers have increased their margins. What they are doing is maintaining their margins and making up the difference through operational efficiencies that show up on the cost side.

Dealer/Provider: Is it your sense that the companies are using their cash positions to invest in business expansion?

Cron: Probably. I base that on the observation that a little under 40% of the firms in this survey grew at a rate of 20% or greater in 2004—which is exceptional growth. For that to happen in a single firm, you might be able to chalk that up to an accident, fluke, or good fortune. But not when it happens to nearly 40 different companies in the same year. You almost have to attribute that to planned, purposeful expansion efforts.

Dealer/Provider: OK, so the continued shortening of ac-counts receivable days took you by surprise. Was this development also the most significant of the survey’s findings?

Cron: I think what really is clear here is that these companies are continuing, year after year, to run better and better.

Dealer/Provider: Any other interesting findings to report?

Cron: We have new evidence that the degree of company profitability is closely tied to revenue growth. While it’s true that a business can achieve significant results through cost and process improvements, what counts the most is revenue growth rate. When you delve into the 2004 numbers, you find that firms reporting negative profit growth had revenue growth a little under 8%. The average for our survey respondents was 10%. But the firms with profit improvement over 20% had revenue growth of almost 18%. The lesson from this is that, as you focus on processes, it pays to have in mind a revenue growth target above 10%, because a lot of that revenue growth will show up as an improvement to the bottom line.

Dealer/Provider: Will you find it necessary to change your thinking about previous assumptions, in light of what you have learned this time around?

Cron: I can point to one in particular. It is the assumption that the consistently most profitable companies are those making less than $3 million a year and those making more than $10 million a year. That has certainly been the case every year for the past four in our survey. Why they should be the most profitable, we are not quite sure. We have theorized that, for the smaller companies, they’ve been able to make money by being focused in particular niches where they can apply specialized expertise and knowledge. We have also assumed that the larger companies are making money because they have the advantage of economies of scale—that is, the ability to purchase in volume and to afford sophisticated IT and management systems. But the numbers from 2004 showed a change in that the companies in the $3 million to $5 million category and in the $5 million to $10 million group were significantly more profitable than the companies in either the largest or smallest categories.

Dealer/Provider: Any clues as to why?

Cron: None. It is something we will have to try to get a handle on in a future survey.

Dealer/Provider: How representative of the industry are the surveyed companies?

Cron: Notably, industry-wide, 25% of dealers and providers are accredited through one or another accrediting agency. However, of the respondents to the AAHomecare survey, 83% are accredited. That means the survey results are not entirely representative of the HME industry, since they skew significantly toward the field’s elite—companies that highly prize quality and professionalism.

Dealer/Provider: What else is known about these firms?

Cron: This year we had 95 firms that responded to our questionnaire. That is down from last year’s 114 respondents. The 95 firms—representing 1,106 locations and employing a workforce of just over 21,000—together accounted for $2.8 billion in sales during 2004, or about 13% of the entire US HME market, which is estimated at about $18 billion to $21 billion. In 2003, median annual revenues among respondents was $5 million, whereas in 2004 it was just shy of $6 million. The 95 firms averaged revenue growth of 10% over 2003.

Dealer/Provider: Your survey divides companies into four categories. Explain that to us.

Cron: The first grouping is companies that derive more than 50% of their sales from HME. The second is companies that derive more than half from respiratory. Then there is a category for those making the majority of their money from home infusion. Finally, we have a category for companies with a more generalized business mix, but that are specialized by geography.

Dealer/Provider: And you like to incorporate in each year’s survey some special-focus questions.

Cron: In 2002, we asked the companies about their practices concerning sleep disorders. In 2003, we collected information about activ-

ity-based management, and asked the companies how they intended to respond to Medicare’s oxygen reimbursement cuts and national competitive bidding scheme. In 2004, we again asked about activity-based management and competitive bidding.

Dealer/Provider: On the subject of competitive bidding, you last time around noted considerable optimism among your surveyed companies concerning how they would fare after Medicare makes it official. A year later, were companies still as optimistic?

Cron: In 2003, 89% anticipated being able to cope with competitive bidding. They did not expect to go out of business because of it. However, we did not ask the exact same questions about competitive bidding in 2004. What we did ask was whether they instituted or intended to institute activity-based management in anticipation of competitive bidding. And we found that about that same high number said yes, that they are or soon will be implementing serious cost-control measures and taking steps to run their businesses in even more sophisticated ways. I think you can characterize what they are doing as continuing to get themselves in shape for what is coming at them.

Dealer/Provider: In our article on the 2003 survey, you offered a couple of longer-range predictions about industry trends. One of them was that, 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. Is that prediction still on track, or are you having second thoughts?

Cron: I stick by that prediction. If you will recall (see the April 2005 issue at www.hhcdealer.com for the complete text of Dr Cron’s original interview), what I said was that smaller, cheaper, better technology should encourage formation of more home care companies, not less, and that improved technology will help small companies overcome the economy-of-scale advantages held by larger companies. Then I added that the reason we could end up with fewer home care companies is changes in Medicare’s rules and rates will make it harder for large and small firms alike to compete unless they are very, very efficient managers of their costs.

Dealer/Provider: Would you care to make any new predictions?

Cron: Not until after competitive bidding has been with us for a while. It could shake up the industry in ways that are detrimental, or it could open the door to new opportunities and usher in an era of greater success for HME companies. Ultimately, we will just have to wait and see.

Rich Smith is a contributing writer for Home Health Care Dealer/Provider.