Reimbursement Update
Every business, small or large, has assets that must be managed successfully in order for the company to maximize profits, but the successful management of assets is critical for home medical equipment (HME) providers. The bread and butter of many an HME provider's business lies in the rental of capital assets - effectively then, asset management is the heart and soul of the home medical equipment business. The business can reap substantial financial rewards by doing it right, and conversely, doing it wrong can needlessly eat away at profits.
There are four basic keys to efficiently and effectively managing assets in the home medical equipment industry. They are managing purchasing and stocking; managing asset utilization; managing location tracking; and managing preventative maintenance. Companies who excel in these key areas will, almost without exception, be more profitable than organizations who take asset management less seriously. Let's take a look then at the basics of asset management by zeroing in on these four key areas.
Purchasing and Stocking
The very definition of waste, from a management perspective, is something that adds costs without adding value, and a large, full warehouse with slow inventory turns is just that-wasteful. A Just in Time (JIT) inventory strategy will allow you to minimize unutilized stock and assist you in working toward the goal of maximizing the cash flow of your business.
It is wise to routinely analyze patterns of equipment utilization when making purchasing decisions, particularly when vendors tempt a business with reduced pricing in exchange for the acquisition of large quantities of a product. |
Successful implementation of a JIT inventory system is dependent on four basic factors:
Reliable delivery from vendors
Relatively short distances between the vendor's distribution point and the HME provider
Accurate tracking of rentals / sales through a software system
Realistic min/max levels
Price is a significant factor when it comes to choosing vendors for products, but it can be easily argued that it's not the only or even the most important factor. Because cash flow is such a central aspect of a successful home medical equipment business, short inventory turns and a high level of asset utilization have a positive impact on profits. So, in addition to considering price and shipping costs when choosing vendors, it is prudent to place a heavy weight on the length of time it takes to receive the products once they have been ordered from the vendor.
Once you have locked in contracts with the vendors who offer a combination of the best pricing and most advantageous distribution points, it is time to fine tune internal processes. To do this most effectively you will need to employ the inventory features of your company's HME software system. Start out by making sure that your have an accurate count of inventory items in the system, then set minimum and maximum stock levels of individual items. You can determine the minimum level easily by multiplying the average number of units of an item rented or sold per day by the time it takes to order and then receive the items from the vendor. To calculate the maximum simply add a safety factor of 10 percent to 20 percent to minimum level. Once you have completed these tasks, you can print reports on a periodic basis that will alert you when items are under or overstocked.
Utilization
Naturally, it is the goal of every home medical equipment company to have the capital assets it has purchased in the field being rented to clients. Large stockpiles of unused equipment place an unnecessary drain on cash flow, and as seasoned industry managers realize, maintaining a positive cash flow in the face of insurance payments that typically come well after the product is provided and services rendered, is key to the overall health of their business.
For that reason, it is wise to routinely analyze patterns of equipment utilization when making purchasing decisions, particularly when vendors tempt a business with reduced pricing in exchange for the acquisition of large quantities of a product. An HME provider may well find these type of bargains attractive and well worth taking advantage of in many instances, but it is always worthwhile to make such decisions within a realistic framework of the company's patterns of equipment utilization.
If, by chance, you do find that your company is overburdened with stock based on prior purchasing decisions, you may want to take the time to seek out limited contracts that may not have appeared quite as advantageous in the past, such as providing equipment to hospice agencies and nursing homes. It is better to accept lower payments than to have the equipment languish unused in a warehouse.
Location Tracking
Once your company has invested in the purchase of capital equipment it is critically important to maintain an efficient and effective tracking system-not only because the Food and Drug Administration requires providers to track the location of equipment they rent or sell in case of a recall, but because the very financial health of the company depends on minimizing or eliminating losses of the costly products that they typically provide to patients. Successfully employing the equipment tracking features of your HME software system will play a large part in minimizing lost equipment.
Most HME software systems track equipment both by serial number, and by lot number (for items that are not serialized). Your first step to effective equipment location tracking is to decide which items you will track in which categories (serialized or lot). Generally, you should track items by serial number when you need to know the quantity of the items owned by the company; the specifics of where each item is currently located (for recall or maintenance purposes); and you also need to depreciate the item for tax purposes because it has been deemed a capital asset. Tax laws change continuously, so it is best to consult with your accountant when deciding on a minimum dollar value to determine if specific types of equipment that are purchased will be depreciated.
Equipment that you do not intend to depreciate can be tracked by specific lot number if you need to know the details of where each item is located once it is rented or sold for purposes of recall or maintenance, and you need to know how many of the items the company has on hand. However, for items that are typically sold such as commodes, walkers, canes and equipment of that type, it may only be necessary to know quantities on hand, and nothing more. In those instances, it may be more efficient to simply track such items by generic, company generated lot numbers that remain the same as shipments are received, rather than to take the time to enter them in the computer system under the constantly changing lot numbers generated by the vendor who you purchased the products from.
No matter how you decide specific items should be tracked, be sure that staff members understand the plan, and insist that they follow guidelines to note serial and lot numbers on delivery tickets and in the computer system when required. Only then will your location tracking process prove successful.
Maintenance
From a perspective of profitability, HME providers have two overwhelming incentives to actively manage the maintenance of their company's capital assets. The first and most obvious is to extend the useful life of the costly equipment that has been purchased. The second is to minimize the company's potential liability for products that may otherwise fail while in use by a patient.
Again, the best way to maintain capital assets is to fully utilize the features of the company's software system. Indeed, it is possible to keep track of maintenance due dates and a history of the equipment's maintenance manually, via tickler files, but what you don't spend on the automation side by using a capable software database, will undoubtedly be eaten up rather quickly in the increased costs of labor needed to maintain a manual system.
Your first task in setting up an efficient maintenance process is to determine the recall period for individual types of equipment. Your best bet is to follow manufacturer's guidelines when determining maintenance intervals. If the manufacturer does not specify a recommended interval, consider setting a company policy of performing and recording routine maintenance between patient use, when the equipment is returned and cleaned prior to being delivered to the next patient.
Because cash flow is such a central aspect of a successful home medical equipment business, short inventory turns and a high level of asset utilization have a positive impact on profits.. |
Typically, if you set recall date timeframes in your computer system and record the dates when maintenance was last performed, you will be able to generate reports that will list what equipment is due for maintenance. When you run these reports be sure to set the report timeframes to look at least 30 days ahead so that you will be informed of maintenance that is coming due before the interval for maintenance has expired. Even more useful are maintenance reports that can be sorted by zip code so that you can meld routine maintenance duties in with regularly scheduled deliveries to the same area.
Successful asset management can be a complicated endeavor for any HME dealer, but as with most aspects of the business, efficient processes are the keys to making it work to support, rather than hinder, the profitability of the company. If effective asset management has been a challenge for your company, look to these four key areas to find opportunities for improvement. The results will no doubt be reflected in the bottom line of your company's financial statements.
This article originally appeared in the July 2003 issue of HME Business.