Page 10 - HME Business, March 2019

Michael Scarsella
Provider Strategy
How to Drive Two Trains at Once
Three ways advanced KPIs and analytics can help HME providers increase their profitability
At a time when many home medical equipment (HME) providers need to keep track of every penny passing in and out of their doors, many still don’t take the time to understand their numbers and struggle with knowing how to increase profitability. Running an HME business without utilizing data and analytics is akin to driving a car using only your rear view and side mirrors. You can see where you are and where you’ve been, but it’s extremely difficult to see where you’re headed.
For the better part of six years, I have spent many of my days walking in and out of home medical equipment stores across the country. I am on the road just about every other week visiting an average of 12 stores per trip. That totals out to more than 1,800 store visits during my short tenure in the home medical equipment industry.
I know what you are thinking: what a romantic way to make a living. True. My stories are a hit at cocktail parties. It doesn’t get much better than mid-level chain hotels and eating alone, but I love it.
I love what I do because each stop involves a conversation. A connection. A story. Every dealer is working hard to figure it out and improve. I enjoy being a small part of that. I enjoy being a passing visitor who learns from one stop how to better help at the next. I enjoy discovering the problem and working with new people to find a solution.
The Value of a Good P&L Statement
One of the biggest problems I have encountered in recent years is the difficulty in separating true cash retail from the third-party billing side of an operation. Both segments have distinctly different cost structures, cash flow mechanics, sales processes, and marketing needs. Each segment requires a clearly defined and unique value chain in order to maximize both top line sales and net profit. Most of the time, I find the managers, owners and operators of many HME provider businesses treating the two segments as one, leading to mediocrity or worse — especially on the retail side.
To drive these two trains at one time, each business must run on separate tracks, and management must fully understand each business both for what it is, and for what it can become. The starting point for this process is the profit and loss statement (the P&L). A reliable and accurate P&L stands as the starting line for all strategic business planning. The P&L is void of emotion and reveals where a business truly is. It allows management to zero in on problem areas and enhance the areas positive performance. The P&L is the baseline for goal-setting and future performance measurement.
In just about every case, the P&L generated by the HME providers busi- nesses that I work with is all-encompassing. In other words, it includes all business units and segments in the line items and totals.
While this is excellent for evaluating the overall health of the business, it proves difficult to make specific and informed decisions at the operational level. A handful of dealers have invested in the point of sale and accounting systems that allow them to produce segment specific financial statements, but this is typically not the norm. The average dealer needs to take the time to peel back the layers to separate revenue streams and expenses to align them with the business segments they drive.
How P&Ls Can Help in the Real World
The power of a good P&L can truly be transformational. Since my background is dominated by retail, my work with customers has focused heavily on store layouts, merchandising, marketing, advertising, and retail-specific perfor- mance metrics. I often counseled dealers that these discussions needed to begin with a detailed P&L analysis.
However, I quickly found that most dealers had neither the time, nor confi- dence to tackle the task. I started providing guidance and walking through the process with a few owners who were willing to share their financials
with me. We took their overall P&L and carved out segment P&L’s for cash, Medicare, and private payor insurance, and the results were more eye- opening than I expected.
For example, one dealer was contemplating closing his doors, but the analysis revealed he was much healthier than he thought. He simply needed specific effort to improve his cash flow. By using the carved-out P&Ls we were able to identify some cash-raising opportunities and implement a few inven- tory and purchasing controls to keep things in check.
Another partner dealer realized his cash sales were heavily contributing
to his net profit, but he was under-spending on marketing specific to his
cash division. The cash flow analysis showed he could afford to significantly increase his spend in this highly profitable segment. Conversely, the analysis showed a deep net loss in the Medicare segment solidifying the dealer’s deci- sion to avoid getting too caught up in the latest CMS changes and Any Willing Provider status.
These are two examples of dealers that can make better, more specific deci- sions about their businesses simply by giving themselves the most accurate information with which to start.
Building a Powerful P&L
So how do you develop a P&L with that level of strategic value? The process is not terribly difficult, but it can take some time. It involves digging into your accounting system and running some key reports, reviewing full company financials including the cash flow statement and balance sheet, and making some educated assumptions in a few areas where the delineation between seg- ments is not hard and fast.
Building segmented financials that operate within a margin of error in the 5 percent range will still prove invaluable in your strategic decision-making process. The management of any HME provider can and should continuously adjust your assumptions as its knowledge base and analysis deepens during multiple iterations of the separation process.
We start with identifying the primary segments of your business: Medicare, Medicaid, insurance, hospice, retail sales, home modification, etc. I suggest starting with these somewhat broad buckets and then choosing which ones you would like to drill further into. The hospice profit and loss, for example, could then be separated into individual contracts to reveal the cost and profitability of each.
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