Many home-based care businesses – particularly those reliant on Medicare revenue – are feeling undervalued on the basis of actual or proposed reimbursement for services. Many providers are examining their book of business with an eye toward separating the good payers from those who are less desirable.
When we think about a business, it’s tempting to think about revenue first because it’s the “top line.” However, revenue can be misleading in an episodic business where service bundles are common. Take, for example, revenue that is considered a loss leader towards some other end – that loss-leading revenue is commingled with other “proper-margin” revenue, which distorts the business picture.
We think it’s more meaningful to understand the profit left over when the episode is over. The way to conceptualize this: You can’t have revenue without a corresponding direct expense, so every episode/visit you record is really the recording of a gross profit event. This is why we believe gross profit dollars drive the business – not revenue.
In fact, the four indicators below tell a much better story than revenue alone:
Gross Margin Percentage: The percentage of revenue left over after subtracting the cost of goods sold, either for a service line or a division or an entire business.
Gross Profit Volume: The quantity of dollars created when we subtract the cost of goods sold from revenue, also known simply as gross profit.
Operating Margin: Also called EBITDA, operating margin is gross profit volume minus operating expenses. Operating Margin is the best indicator of P&L health as it factors in all direct and indirect expenses while ignoring the variation from business to business created by variable tax burden or financing.
Margin/Service Mix: Margins by service, according to the dollar value of each service.
We have found that providers tend to look for Margin in the following five areas:
Increasing existing-service revenue by expanding coverage areas or negotiating better payment rates.
Improving the productivity, utilization or billing of direct care staff.
Lowering the cost or utilization of non-staff direct care expenses.
Driving operating efficiency and lowering operating expenses.
Launching or acquiring new service lines, potentially with a higher margin than existing services.