Respiratory Solutions

Business Strategies for a Cutting Environment

• By Nancy Nunley
• Mar 01, 2009

Faced with today’s economic challenges, many companies plan not only to contain costs, but to cut costs. The tactic may be to switch to non-delivery oxygen technologies to decrease delivery expenses. Market dynamics and history, however, demonstrate that companies can't cut their way to profitability over the long term. So, what else is there? Growth.

Growth is a business element ingrained in publicly traded companies. With the exception of the national HME companies, most providers are not publicly traded, so perhaps it's not as ingrained. For publicly traded companies, Wall Street measures the vitality of a company by its growth — more precisely, by its price-to-earnings ratio. Yes, Wall Street is unsettled these days, but generally, the stock price is what investors are willing to pay for future earnings, and growth is how one affects future earnings.

Why should HME providers focus on growth in their oxygen business? Because growth is the way companies decrease the average cost of service per patient without damaging the future viability of the company. Cutting expenses without growth damages long-term viability. With growth, the company leverages (spreads) the cost of business (the trucks, inventory, building, O/H, personnel, etc.) over a larger number of patients. With growth, the company realizes opportunities for incremental lines of revenue. With growth, cash flow is better protected because sources of revenue are derived from a larger base of customers (referrals, end-users and payors).

Growing the oxygen business is anathema to some companies, and they can cite a litany of reasons. Yet there are opportunities to profit in a bear market, and there are opportunities in the home health care market to grow the oxygen business. Gaining one new oxygen patient results in approximately $9,000 over three years. What other patient group really compares? Gain enough new patients, and the average cost of servicing the oxygen patient decreases regardless of the modality. Volume and subsequent economies of scale are the endpoints from this business perspective, and the right equipment for each patient is the clinical service goal.

How can companies grow in the oxygen market?

• First, stay in the game and focus primarily on new oxygen patients. Market demographics support substantial growth in oxygen.
• Gain a greater percentage of new patients from existing referrals and gain new referrals.
• Tap the current base. How many oxygen patients in the company's base are at the five-year point, and ready for retest and new equipment?
• Brand the product or service offering. A familiar and positive image of the offering gives companies a better-than-even chance of becoming the referral's first choice.
• Always look for ways to innovate and reinvent the business. Offering services or products that no one else does can open doors with new referrals. Remember, it’s not merely different; referrals value the difference.
• Use a new technology offering to gain access to a new referral.
• Do your homework. Go beyond what you think you know to explore new ways to offer innovative and valuable services to the customer base. Market research has demonstrated that customers use more than 150 measurements to decide if their needs are met. Can you identify more than five of your customers’ needs?
• Be a first mover with new technologies. Don't wait for competition to lead or until all players offer the same product/service. When all players agree it's the right decision/right product/right service, then what is left to compete with is price. The bigger players always win in that scenario.

This article originally appeared in the Respiratory Management March 2009 issue of HME Business.