sales equivalency

in Healthcare

Sales Equivalency Calculation

Let’s talk about sales equivalency. Medinas Health has an overall mission to help reduce waste in healthcare, and an interesting question I’ve gotten from different people is “how much savings actually matters to a hospital?”

Well, it depends.

In my evolving endeavor to understand the US healthcare system and save money, I’ve been looking at different ways to actually measure the impact the savings Medinas Health has created from a financial perspective. That brought our team to looking at calculating sales equivalency.

Something that may shock you is that the  mean operating margin for a US hospital fell from 3.4 percent in FY 2015 to 2.7 percent in FY 2016. The increase in the hospitals’ expenses was largely driven by growth in spending on prescription drugs and labor expenses.

Anyway, we decided to calculate the potential sales equivalency impact of our savings for a hospital at the simplest terms:

(Amount of Savings ÷ Profit Margin) = Sales Equivalency

$100,000 ÷ .027 = $3.7M in equivalent sales

That means every time we hand a hospital a check for $100,000 we’re giving them cash that is the equivalent net revenue of their doing $3.7M worth of business.

We have only been around for a few months, and we’ve already handed a hospital a check for $120,000. That’s the equivalent of their doing $4.7M in sales.

That’s crazy.

The lower your operating profit, the higher impact cost savings can have, so when it comes to healthcare, every penny counts.