profitability

Opportunities in HME

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CMS’s Office of the Actuary has published their National Health Statistics for 2016 (they always run about a year behind.)  A few interesting statistics in there about HME:

  • The annual growth rate across all HME categories will average about 6% a year for the next several years.
  • Unit growth and demand will result in total HME spend five years from now (2022) being nearly 30% greater than the HME spend in 2017.
  • The increase in HME spend in 2018 over 2017 – in terms of total dollars spent – will be a greater increase than in any year in the past decade.
  • Looking at 5 years ago vs 5 years from now, to gain perspective, shows Medicaid as the payer source that will have grown the most, by a fair margin. Private health insurance grows proportionately as well.  Medicare shrinks in proportion.  Said another way, Medicaid and private health insurance become more important to HME providers than they have been in the past.

Yes, those serving the HME space face many daunting challenges, there isn’t much argument over that.  But we do so in a market that is growing in dollars and growing much faster than almost every other segment of our economy.  Shifting sands are requiring us to change, to do things differently, to re-prioritize and to focus.   But opportunities abound.

 

The Power of NEW

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NEW.  “NEW” is an important element in building a vibrant and lasting HME or O&P business.  Without NEW your business is slowly dying.  If you are interested in building value over the medium or longer term, you must seek to inject an element of NEW in your revenue streams.

Netflix offers us an example of NEW that we can all get our heads around.  Netflix spends an enormous amount of money on developing original programming (NEW).  Most of their content is movies and shows developed by others.  They also have a tremendous library of their own original content, developed in the past.  If they were to stop spending on NEW content today, their expenses in 2017 would go down dramatically and their earnings would rise a commensurate amount.  Their 2018 year would be similar.  Netflix financial results would be much better over the next two years if they stopped spending on NEW.  But by 2019 they would start to experience decline.  The loss of a NEW pipeline in 2017 and 2018 would impact revenue in 2019.  By 2020 Netflix, without the NEW content developed in 2017 and 2018, would experience an accelerating decline.  I doubt they would survive to the end of 2021. They are better off tomorrow without NEW, but over the medium term, they die without NEW.  You’re not all that much different.

NEW usually does not help profitability in the year it happens.  Often not even the next year.  But NEW is the fuel of future revenue.  Fuel of a vibrant enterprise.  Fuel of profits to come.  NEW comes in several forms for HME and O&P.  A new referral source.  A contract with an additional payer.  A facility not previously served.  Selling on-line.  Product and service lines not previously offered.  There are so many possibilities in NEW, from Philip’s non-invasive ventilation to Afflovest to Rifton’s Tram to Incrediwear’s compression sleeves.  The possibilities of NEW in our business are nearly endless.

All revenue sources follow a curve based on the laws of economics.  At their outset, NEW revenues usually have a lower profit contribution than our old favorites.  Entry costs, lower volumes, resistance and failure rates ensure this.  But over time profit contribution grows.  At the same time, OLD revenues, which tend to be your highest profit contributors, usually settle into a pattern of slow and steady decline, victims of the steady march of commoditization, aging technology and loss of energy.   Don’t abandon OLD.  OLD is your friend and will be almost all of your profit this year.   But you need to invest in NEW this year so that in 2019 and 2020 your business remains vibrant.  I challenge you to make NEW revenues 5% or more of your 2017 revenues.  If you do this every year, you’ll have the right mix of high-profit OLD and high-future-profit NEW to sustain your success.