Tools and Tips

• By Michael Lehtola, Lynne Brown
• Mar 01, 2006

Home medical equipment company owners and managers have a lot on their plates. Since they represent the operations side of the business, they need to oversee all areas of their company while keeping things running well. And with constant cuts in reimbursement, it is more important than ever for management personnel to keep companies running efficiently. There's no margin for error any longer, and there's no room for waste.

How can a busy HME company manager keep track of everything and still have time to troubleshoot problems on a day-to-day basis? The solution is to create an executive dashboard — a list of specific data to monitor on a weekly or monthly basis to ensure that operations are running smoothly and to provide the information needed to rapidly respond when necessary. The benefits of your executive dashboard also extends beyond the immediate gratification of keeping an eye on current trends, they also can be used to help formulate next year's business plan, budgets, or other financial projections, and help hone sales and marketing strategy for the coming year.

1. Begin to Create an Executive Dashboard

Use a spreadsheet to help compare and contrast data points from month-to-month and in rolling six- or 12-month cycles. An executive dashboard might also be supplemented with hard copies of management reports that are generated by your software system. You should be able to derive most of your data from a software system, and hard copies of reports might contain more detail than what you need on the spreadsheet you create.

2. Know Your DSO

Every HME owner or operations manager should always know their businesses current Days Sales Outstanding (DSO). The DSO is a measure of the average time it takes to collect receivables. If it's too high, cash flow may be a problem. Many software systems don't calculate that figure, but you can create a formula in your spreadsheet to calculate it if you input the proper numbers. Take your revenue numbers from the last 12 months and subtract any contractual adjustments and divide that by 365 to get an "average days sales." Then take your current accounts receivable total and divide that by your average days sales to get DSO. If it's greater than 70-80 days, that should raise a red flag about your reimbursement processes.

DSO can be meaningless if your company's habit it to let uncollectible receivables accumulate over a period of many years, or if you write things off too quickly before determining that the receivable is absolutely uncollectible. Because DSO is an inexact measure of reimbursement processes, you also should calculate the amount of billed revenue (again, subtract contractual adjustments) converted to cash. You can derive this number by totaling revenue over a period of three-to-six months, and dividing it by cash collected over an equal period of time with a three-to-six month lag built in to account for normal time spans between billing a claim and getting paid for it. For instance, you might take the total amount of billed revenue for January through March and divide that by cash collections from April through June. If that percentage is less than 95 percent, that should also raise a flag about reimbursement processes.

3. Track Your Accounts Receivable

Naturally, you want to track your accounts receivable aging by time frame and by payer. Money more than 180 days uncollected is definitely at risk, and timely filing deadlines are likely to kick in with some payers, so keeping a close eye on deadlines is important. You might want to settle for computer system reports for this, and keep the totals on the spreadsheet for the DSO calculations. But it's a good idea to save the summary reports in a binder so that, if necessary, you can review the history of the receivables aging.

4. Have the Right Computer System

Hopefully, your computer system also can provide data about adjustments and write-offs. Adjustments should be defined as not indicative of process problems such as contractual adjustments, negotiated discounts and the like. Write-offs should be defined as errors that were made in some part of the process that prevented the claim from being paid, such as "not medically necessary" or "no prior authorization obtained." If your system lets you tag adjustments and write-offs to user-defined reason codes, carefully define them and check them every month. This can help you zero in on reimbursement process problems. No executive dashboard is complete without this information.

5. Track Suspended Revenue

One final data point that will help you assess ongoing reimbursement processes is tracking the amount of held or suspended revenue that is waiting on documentation or some other information needed to bill the claim. Again, assess this by dividing the total by your average days sales. If it's greater than 30 days sales outstanding, look at intake and documentation processes to find the cause and take steps to correct it.

There's more to running your business than simply making sure reimbursement processes are well tuned. You will always want to routinely evaluate new business that is coming in so you can adjust sales and marketing targets, and perhaps your overall sales and marketing strategy.

Unless you're a niche provider, diversity in your payer and product mix will offer your company some protection when a major payer makes drastic changes to coverage criteria or reimbursement for select products. If you can set your computer software to group payers in categories such as Medicare, Medicaid, private insurance payers, managed care payers, and cash sales you should be able to calculate your payer mix in terms of billed dollars by percentage of the business. The same holds true for product mix if you can set categories for things such as oxygen, other respiratory equipment, ambulatory aides and so forth.

A few more items and our executive dashboard will be complete. You need to know if your business is growing as planned and how much exponential value is being gained from new recurring rentals. Keeping track of sales revenue, versus re-rental revenue, versus new rental revenue can provide you with that information.

Lastly, monitor where the business is coming from. List the current top 10 or 20 referral sources for your company and track the number of referrals they make each month. Always set up the referral database in your software system to track the person that actually made the call to your intake department. It's often not the physician, so simply listing the physician's office that initiated the referral will leave you without critical information. If one of your referral sources suddenly drops off, you will certainly want to investigate the cause. Conversely, if you break into a new market or develop new referral sources that have become loyal to you, then you will want to review the sales strategy and techniques that were used and repeat them with other targets.

It's a fact that knowledge empowers owners and managers and provides the tools necessary to keep an HME business on track. A company that has an owner or operations manager armed with all this information on a routine basis can be a formidable competitive force in the marketplace. And it's nothing less than crucial in these times of constant threats to reimbursement.

This article originally appeared in the March 2006 issue of HME Business.