Payment Strategies to Maximize Cash Flow for Healthcare Providers

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1 Payment Strategies to Maximize Cash Flow for Healthcare Providers Personal banking has radically changed over the past twenty years. How often do you write a check? Many people do not even know where their checkbooks are located. At the point of sale, credit and debit cards have nearly replaced cash and checks, and for bill payments, electronic bill pay systems provided by the banks and software companies such as Quickbooks have replaced the check in the mail as the price of ink, paper and postage increases from year to year. Business banking, on the other-hand, is still heavily reliant on the traditional process of printing checks, stuffing and stamping envelopes, and waiting for the check to arrive. Why is it that businesses have been slower to embrace electronic and adopt less costly methods of financial settlement? And why is it that healthcare lags even further behind other industries with basic business operations? The reality is that many businesses are wary of alternate solutions to process payments. Credit cards offer the possibility of a financial benefit through a rebate, but suffer from challenges in acceptance rates, integration with payment systems, and fear of fraud. ACH (Automated Clearing House), the most commonly adopted electronic payment method, succeeds in paying the vendor faster and eliminates the mailing process, but does not offer the discount benefit of a card nor the additional cash float of a check. The variety of new technologies can be overwhelming, leading to decision paralysis. With the increased complexity, uncertainty and reduction in healthcare revenue receipt and reimbursement, health systems typically prioritized revenue cycle initiatives when investing in improvement opportunities. Cash outflow is lower on the list for process improvement and today many hospitals still utilize checks and other payment methods that provide no financial benefit, such as ACH. Prompt payment discounts in the healthcare industry are rare, and therefore, less of a focus for accounts payable operations. The mistake made by many organizations as they look to replace checks is to focus on the elimination of the manual process of mailing the checks. However, they do not factor in the larger financial opportunity in discounts and rebates that can be earned through prompt payment discounts and rebates from payment processors for using their solutions. The best payment strategy requires a combination of options harmonized in a way that maximizes the financial benefit and minimizes the work required. Developing a comprehensive payment strategy should be a priority for any healthcare provider. In this white paper, we will review the components of a comprehensive payment strategy and the payment technologies that will enable such a strategy. Types of Payment Automation The following is an overview of the most common types of payment automation solutions. 1. ACH: ACH, or Automated Clearing House payments, are bank-to-bank payments initiated by the Payer to the bank of the supplier. This technology has long been available and is in use in many organizations at some level. For the supplier, it offers a fast payment with money available

2 often the next business day. For the Payer, it provides a method that avoids the hassle and cost of printing and mailing a check. 2. Payment Cards: Payment Cards are credit cards used for the payment of goods or services. A Purchasing Card is a variation of a Payment Card used to pay for goods or services at the point of purchase, commonly to avoid the process of creating a purchase order and entering an invoice. Purchasing card use is often limited by policy due to control concerns. Travel and Expense and Gas Cards are also forms of Purchasing Cards with a more defined use. A pure Payment Card is used at the point of payment, not purchase, and therefore is focused entirely on two benefits: 1) To, avoiding the printing and mailing of the check and 2) To obtain a rebate from the payment processor. 3. Virtual Cards: Virtual Cards are used in the same manner as Payment Cards. However, they are not physical cards but simply card numbers. These are also commonly referred to as ghost cards. 4. Payment Exchanges: Payment Exchanges manage the payment from the Payer to the Supplier by securing the banking information of both the Payer and Supplier. The payer-approved payment information is securely sent to the Exchange and processed to their chosen suppliers in the most favorable payment mode that the Supplier will accept. This allows for several benefits: 1) Eliminating the check processing 2) Avoiding the need of the Supplier to provide banking information to the Payer (a common reservation with ACH) 3) Avoiding the need for the Payer to send the proper remittance information (typically a separate and manual step) 4) Providing an automated way to obtain the most beneficial payment method, as will be discussed later in this document Challenges with traditional payment cards Credit card providers have taken over the business-to-consumer space, ensuring they receive a small portion of the transaction value of most purchases of goods and services. They have long desired to do the same with business-to-business transactions and have heavily promoted their payment cards. While these cards offer benefits including streamlined transactions and rebates to Payers, they have faced many challenges in fully replacing traditional payment methods. 1. Acceptance Many suppliers have been reluctant to accept a payment method that requires them to accept processing fees. These fees, which can range from 2-4% of transaction amounts, are often confusing as there are multiple points of charges from multiple entities involved in the interchange. However, Accounts Receivable departments have started to become more aware of the cost of processing these transactions and not all vendors are willing to accept those costs. This is most significant in the case of healthcare distributors. The distributors who provide supplies, pharmacy, and food represent the vast majority of the non-labor spend for healthcare providers. In order to obtain best pricing, healthcare systems often agree to pay these vendors early or in some cases, pre-pay. If 70-80% of the spend of the healthcare system is excluded from the payment card program, the opportunities become extremely limited.

3 2. Reconciliation The traditional cards are a pull method of processing meaning that the Payer informs the Supplier of an approved payment and trusts that the supplier will charge the card the approved amount. However, there is nothing to prevent the Payer from charging more or less to the card. The Supplier also must act upon the request, and it is common for them not to do so timely or for a miscommunication to result in payments not being processed. The result is that payment card customers often report that reconciliation of the cards is a nightmare, involving a significant effort to reconcile differences in amounts or to chase vendors down to process the charges timely. We have found payment card customers with full-time staff dedicated to reconciling card transactions. 3. Maximization of Rebates Traditional card programs proposals will focus on the standard ticket rebate amount, but there will often be a second, lower rebate amount known as Large Ticket. Large ticket transactions are those over a certain dollar amount and are processed at a lower transaction fee, and therefore a smaller rebate is returned to the Payer. In our industry, invoice amounts can be substantial and are often batched, thus a larger number of transactions are processed as Large Ticket. This is particularly the case with the advent of shared service centers, who typically combine payments across multiple hospitals in order to reduce costs. The result is that the actual rebates that healthcare systems realize are often basis points lower than expected. Maximization of these rebates requires a solution that maintains the integrity of the individual invoice amount to avoid unjustified large ticket transactions. The Flaw of ACH At some healthcare organizations, ACH has become the priority to eliminate checks. Many accounts payable departments have created campaigns to enroll vendors in the program, contacting each to obtain banking information. While some vendors resist providing banking information, many will readily do so because they realize the flaw of ACH -- that the vendor is the beneficiary of this change. Unlike other payment methods, the ACH payment costs the Supplier nothing. Fees are instead paid by the Payer. Simply put, the Payer does all the work, collects and maintains all the information, and pays the fees. The Supplier gets paid faster and no longer loses the float from the check in the mail or waiting to clear. Therefore, while ACH is effective and provides a small savings from avoiding printing and mailing a check, it does not provide the financial incentives of payment cards and exchanges. In most cases, the interest that would have been earned in a sweep account over the week of mail and processing time far exceeds the financial benefit of not printing and mailing the check. In addition, ACH provides posting and reconciliation challenges. Unlike a formatted EDI payment, ACH payments do not include remittance information and therefore require manual posting on the part of the supplier. EDI payments produce efficiency for the vendor by reducing their labor costs, and many vendors are prepared to offer small discounts due to this savings.

4 Should you pay fast or slow? Even though healthcare systems everywhere struggle to make a profit and maintain respectable margins, the actual cash flow positions of healthcare organizations vary significantly. Many healthcare organizations have strong cash flow due to exceptional financial management and market strategies, healthy endowments/foundations and successful investment of their funds over time. Others struggle to pay bills days after their due dates. Those healthcare systems that are blessed with healthy cash flow often fail to properly leverage it to their advantage in the payment process. We have worked with systems that pay invoices upon receipt, for example, rather than wait until the last possible time to make payment. Others fail to take advantage of prompt payment discounts even when the cash is available. Should you take a prompt payment discount? The math will tell you that unless you earn at least a 37% return on your capital, a 2% net 10 discount is a better deal. Even if you have to borrow money to obtain these discounts, they are probably worth taking. Unfortunately, few vendors offer them any longer due to the low cost of capital today and the associated effort to govern compliance. Ironically, vendors want to penalize their clients for late payments but resist incentives for prompt, on-time, predictable payments. Organizations that pay late to stretch cash flow often create a significant burden with: Reduced ability to obtain optimal pricing Late fees Lost discounts Credit holds and vendor complaints Developing a Comprehensive Strategy The challenge in healthcare is that often you have three organizations involved in determining how payments are made Treasury, Accounts Payable, and Contracting. However, these three departments are not in alignment, and rarely collaborate to create a comprehensive payment strategy. Treasury s objectives are most often to keep cash flow as strong as possible with a focus on increasing bank balances and income earned through investments. They also are often working directly with the banks and are interested in reducing bank fees and increasing financial opportunity of rebates offered by the bank in payment arrangements. Accounts Payable is interested in paying invoices as fast as possible to avoid angry phone calls from vendors. They are motivated to leverage prompt payment discounts where possible, assuming the staff is aware of the discounts, the discounts are easy to process, and if the invoice can be approved in the timeframe required.

5 Contracting is most often motivated by a desire to obtain the lowest possible product price. Negotiating payment terms that include a financial benefit such as a prompt payment discount or accepting a payment card are often not a consideration. A Comprehensive Payment strategy requires alignment of these three operations into a single goal -- to obtain the best possible financial advantage for the healthcare system. That will include the best possible price at a set of terms that is achievable and consistent with the payment strategy, which could be to pay faster, or, take advantage of payment program rebates but most importantly, to enable the payment mode that offers the best value to the health system. Hap-X -- Optimal Automation of Payment Strategies A comprehensive, optimal payment solution must bring measurable value to both the buyer and the supplier; all parties must benefit for sustainable participation. Flexible payment modes, beyond the traditional methods must be offered, allowing the health system to settle invoices via the most valuable method the supplier will support. In response to the challenges described above, Hap-X maximizes value for all parties with: Strategic and maximum vendor participation resulting from: o Relationships with key, high-spend healthcare suppliers offering multiple payment rails to accommodate the provider s and supplier s needs o Flexible payment modes beyond traditional bank methods (ACH, card) Payment processing through a single portal, using the same file, and including both card and non-card-accepting vendors with a financial return (revenue share) for all Ability to push payments to vendors using an EDI format, easing reconciliation for both parties and allowing the vendor to avoid the manual posting of payments needed with ACH or card payments. Providing this benefit to the vendor supports their ability to provide and justify financial incentives for the provider Ability to maximize rebates by minimizing large ticket transactions Tools and technology to ease set-up and use, manage and streamline reconciliation, real-time transaction visibility, reporting and analytics. Innovative strategies and technology to encourage participation by resistant suppliers, such as Payment Compliance Policy and Utility-based Pricing (an opportunity for a supplier to offer a prompt pay incentive based on aggregate available payments from Hap-X collective providers) A support team offering thought-leadership and consultative guidance to increase effectiveness and collaboration of the Treasury, AP and Supply Chain processes in support of realizing the best value payment strategy for the health system

6 About Brian G. Rosenberg Brian Rosenberg is Chief Executive Officer of TRG Consulting, an industry leader in Healthcare Procureto-Pay (P2P) best practices. He is a frequent presenter and published author on topics such as accounts payable optimization, P2P, ERP and other AP/Supply Chain software implementation strategy. For over 15 years, Brian has helped healthcare providers optimize procure to pay processes and design and build shared service operations. Brian is an active member of the International Accounts Payable Professionals (IAPP), Chairman of the Editorial board for Financial Operations magazine, and an active member of the Association of Healthcare Materials Management (AHRMM) TRG Consulting is a procure to pay optimization firm that leverages true industry experts to develop and execute strategies that save costs and increase efficiency. TRG Consulting is one of the innovators in design and build of shared services for procurement and accounts payable in the healthcare industry and is a leader in automation and process improvement in the procure to pay process. About Hap-X Hap-X is a healthcare-dedicated, strategic payment exchange providing immediate and measurable financial and operational benefits for healthcare Providers and Suppliers. It is the only Exchange to process best value payments through a single portal, using the same file, and includes both card and non-card-accepting vendors with a financial return (revenue share) for all. The company was created in response to a health system s need to better manage their cash flow and to better align their Days Payable Outstanding and Days in Accounts Receivable. When it became apparent that key healthcare suppliers would not accept a card payment due primarily to fees charged by credit card companies, the founders, who brought healthcare supply chain, financial and consulting backgrounds, worked with both the health system and suppliers to create an alternative, yet complementary service that would achieve the objectives of the health system and also be cost-justified by the supplier. As a result, H-Card, LLC was formed, offering a payment exchange to benefit all constituents, remove costs from the process and provide a portal to support the best-value payment mode for the health system and supplier. H-Card went to market in 2006, rebranded their solution in 2010 to Hap-X (Healthcare s Automated Payment Exchange) and subsequently partnered with healthcare solution and financial service organizations to create a comprehensive, robust and unique client solution. Today, more than 400 hospitals transact business across the country through Hap-X.