Profit margins: The misunderstood objective
It’s constant improvement, not a magic number
Everybody wants the best possible profit margin for their company. However, there’s a right way and a wrong way to approach profit margins, and how you go about chasing profit margins could make the difference between simply staying alive and thriving.
"Everyone is looking for profit margin and it seems to be the magic number," says Gary Collins, president of Professional Reimbursement, a consulting firm based in Orlando, FL.
The wrong way.The first tip experts give in terms of analyzing profit margins (income minus contractual allowances minus all expenses) is to stop the comparison game: Don’t look at any organization other than your own.
"It’s unrealistic to set one number for all home infusion providers," says Joe Cabaleiro, RPh president of Excel Consulting, in Cary, NC. With so many variables coming into play, an acceptable profit margin for one provider may be abysmal for another.
"A lot of smaller organizations and hospital systems have a different mission than national, publicly traded companies," says Cabaleiro. "Some providers take all patients to serve the community, but if you do that you’re not going to take in a Caremark profit. Those companies are selective and they have to meet expectations on Wall Street."
"Profit margins basically depend on the organization and what profit margins it feels are reasonable," says Michael Tortorici, RPh, MS, president of Dayton, OH-based national health care consulting firm Alternacare of America. "If a provider has a 10% pre-tax profit and they are doing $3 million a year in net billings, 10% of $3 million is $300,000 and for an entrepreneur after all the salaries are taken out, that’s not bad. However, if you have a large corporation with profitability of 20%, after they take out all the corporate overhead they’re not going to have that, so it all depends on the organization."
The right way.The bottom line in succeeding is to look at your profit margin and try to improve upon it, regardless of where it’s at.
"You always want to try and do better," says Cabaleiro. "Reduce expenses through all the typical means of reducing expenses. Ask Is this a profit margin I can be happy with?’ Finally, see if there is some way to increase it."
When looking at your net profit success, Cabaleiro recommends considering the following factors:
1. Who are your patients? "Do you serve patients who are not economically well off or are you in a wealthy community with private pay," he says.
It’s not just reimbursement, but ancillary constraints that, if you don’t have a solid control of your costs, can eat away at your profits.
"If you have a high number of TPN [total parenteral nutrition] patients and they are more time-consuming, you can’t compare to a provider who may be doing more enterals which don’t take near as much time to manage as a TPN or chemo case," says Collins.
2. What is your overhead? For example, layers of management or staff can dramatically cut into your profits.
"A home infusion company with numerous employees or nurses will end up with a different type of profit margin than a company that may be a more streamlined infusion pharmacy," says Collins.
Overhead includes many areas in which you can possibly reduce your costs.
"One of my clients has a distributor nearby and knows he can have same-day delivery for a product if he needs it," says Collins. "That works well for him because he can keep his inventory low and his costs down."
Keep in mind there is only so much you can do, though.
"If you have personnel and facilities, those costs are fixed and that has a negative impact on your bottom line," says Tortorici. "You can’t raise your prices because reimbursement is going down. You can try to increase your volume, but you can also try to become more efficient, but you want to be prudent, not cheap, and there is a difference."
To illustrate this point, Tortorici uses the following example. Consider a local provider with one nurse who does a great deal of traveling and as a result the provider pays a great deal in overtime and mileage. If they bring on a few per diem people and use them to reduce overtime, they don’t have to pay the overtime, they don’t pay benefits, vacation and health insurance and if the per diem staff visit patients in their geographic area, there is a smaller mileage reimbursement.
3. Look at the big picture. Cabaleiro points out that in some situations a lower profit may be beneficial to your organization’s overall health. Why? A figure called days sales outstanding.
"A quick pay at a lower profit may be better than long pay at a high profit if you have to wait six months for payment," he says. "On paper you can be knocking down the world’s greatest profit margin, but if none of that money is coming in, that’s another thing. It’s just a paper gain. Do you want to make a 25% profit but wait six months to get it or do you want to make much less but get my money quicker?"
Collins agrees. "If it’s taking you too long to get your money and it’s just sitting out there tied up, it could be in the bank or you could have used it," he says. "You need to look at your accounts receivable."
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