Inworks

Introduction

Recent regulatory changes, such as the Affordable Care Act, ICD-10 mandated technology overhauls, declining reimbursements and more, are putting the squeeze on hospitals and health systems. These providers are now working harder than ever to streamline processes in an effort to reduce costs and boost margins. A significant part of this challenge falls upon financial officers and treasury managers, who must gain greater visibility and control over AP disbursements.

Unfortunately, many hospital AP departments are still saddled with manual processes, even though these systems are unnecessarily costly and inefficient. According to the 2013 AP Automation Study published by the Institute of Financial Operations, the cost to process a paper invoice ranged from $2 to more than $25 each. (Some 36.6 percent of respondents were unsure how much they spent.) As for payments, 70 percent of disbursements by U.S. companies are still done by check, at an average processing cost of anywhere from $1.61 to $8.00 per transaction.

Overview

In this paper we will examine:

• The benefits of transitioning to electronic payments
• The three steps to transitioning to invoice and payment automation

The Benefits

Streamlining AP can help your institution improve cash availability, increase efficiency, reduce expenses, and turn your accounts payable department into a revenue center — all with no cash outlay required from your hospital. With a comprehensive AP Payment Automation and Invoice Automation program you will be boosting AP efficiency while saving time and administrative costs.

Consider this example:

A hospital with $500 million in operating expenses may realize:

• New Rebate Revenue $350,000/year
• Additional Cash $10 million (6.3 days)
• Complete AP Automation

To illustrate the significance of the revenue-generating potential of an automated AP system, consider this: To realize $350,000 profit through patient receivables, you would need to generate $11,667,000 in revenue at 3% margin. With an automated electronic AP system, you can earn $350,000 in payables-based revenue AND improve efficiency, with minimal administrative setup and NO additional cost. How much time, energy, and financial resources would you need to spend in order to generate an additional $11.6 million in patient revenue? With that in mind, AP automation deserves a closer look.

Rebate Income – Electronic payments systems can actually create a revenue stream for your hospital by allowing you to take advantage of early pay options and add incremental income to your bottom line.

Improved Days Cash on Hand (DCOH) – There’s nothing more important to potential creditors than a borrower’s liquidity position. With all of the uncertainty in the healthcare industry – and the economy in general – today, there is no substitute for the margin of safety and flexibility that cash provides.

Improved Bond Rating – Extending your DCOH can also improve your bond rating, thus increasing your ability to borrow money at lower rates. The cost savings here could be staggering.

Reduced Paper and Processing Costs– Electronic payments can save you roughly $5.00 per check, in paper, printing and processing costs. Even if you only convert 35 percent of your total checks to electronic payments, you incur a tremendous savings.

Better Use of Resources – Automating AP helps free your AP department from low-value work and allows you to focus on higher-value and higher-priority tasks, such as managing and improving vendor relationships, better spend management, problem resolution, and vendor consolidation (an initiative that can result in pricing discounts and enhanced service).

Three Steps to Transitioning to AP Automation

Step One:

Appoint an internal team that understands the various electronic payment modalities, how each one impacts the health system’s bottom line, and what process efficiencies they would create. It’s crucial the team understands and keeps all of these priorities in focus, so that no opportunities are lost. Also, you will need support for this initiative communicated from the top of the organization down. Your AP department needs to know what is in it for them, and there is plenty (see “Better Use of Resources,” above).

Step Two:

Convert your suppliers to electronic payments, wherever possible. The following are electronic payment method options you can offer your suppliers:

Business-to-Business (B2B) Credit Card Payments – B2B credit card payments have grown rapidly in popularity over the past few years. In addition to eliminating paper checks, B2B credit cards and virtual card (VC) payments also offer unique benefits to the supplier, such as faster payments, as well as detailed remittance information accompanying the payments. These methods offer a big benefit to the health system as well, as they generate income in the form of rebates. That’s why credit card payments should be a hospital’s first-line payment method, and every effort to accommodate the supplier should be made. Even if the supplier charges a fee, this method still may make financial sense and should be evaluated on a case-by-case basis.

Getting suppliers on board with credit card payments – and keeping them on board – can be labor intensive, but it’s well worth the effort. Here are a few things to keep in mind during this process:

• Some bank card programs will assist with the conversion of your suppliers to a B2B credit card program for the first 90 days. In these cases, you supply the contacts, addresses and phone numbers and send a letter to your suppliers. The bank reaches out to your larger-volume suppliers on your behalf and encourages participation. If there is no value perceived by the supplier, the process remains manual for this vendor. No other payment modalities or options are provided to the supplier to convert them to alternate electronic payments.
• After the first 90 days, your AP department will need to reassume the bank’s role. You will need to modify payment terms and types for suppliers who no longer wish to accept card payments, and you should continue recruiting new suppliers as well as making repeated appeals to your unenrolled suppliers. This process will determine how successful your electronic payments system becomes.
  (TIP: A good time to revisit with existing suppliers is when a contract is up for renegotiation.)
• Many suppliers may be willing to adopt B2B payment cards but cannot be converted to this payment method. Payment portals, cards on file, single use cards, and the like, are all ways suppliers accept payment, but only one of these may work for YOU. Keeping a separate file for each payment type can be difficult and reconciling on the back end unwieldy. This leaves a large segment of card acceptors unconverted, and translates into a grossly underperforming B2B card program.

ACH Payments – When a payment card method doesn’t fit a supplier’s needs, setting up ACH payments is the next best electronic payment option. Automated clearing houses (ACH) process large volumes of electronic credit and debit transactions in batches. This method involves contacting each vendor and asking them if they have the ability to accept ACH. ACH may not always be the best fit. ACH requires suppliers’ bank information, and the perceived privacy and security risks associated with providing that data may discourage some suppliers from enrolling. Moreover, since suppliers’ bank accounts may often change, additional management of the vendor database becomes both onerous and costly for you, especially when ACH payments are returned. An ePayables company will streamline this process, eliminating the administrative burden from your AP department (see “Secrets to a Successful Transition,” below).

Wire Transfer – A Last Resort – While wire transfer is the least preferred method of payment, there are times when it’s unavoidable. In cases where funds need to be received immediately, wire transfer is your only viable option. Be prepared to pay about $40 per transaction, negatively impact your days cash on hand (DCOH) and give up any potential to generate revenue for this form of payment. In cases where you are paying overseas suppliers, a B2B credit card payment is preferable, provided you do not incur a currency conversion fee.

Step Three:

Benchmark your program. It continually surprises me how many organizations have some type of ePayables program, but very few have a handle on how well the program is (or isn’t) performing. We will explore this in detail in other articles, but simply stated, you need to establish how the program is performing against your expectations (both in terms of financial gain and process efficiencies).

• Financial Gain: Are you getting what you were expecting from the program?
  

  There are many payout variables in these types of programs; results greatly depend on the composition of the payment modalities within your ePayables program, the size of the individual payments, and the total dollar volume run through your program. Because of this variability it is best to look at the program comprehensively, and get rate of return based on the whole book of business. Four variables to measure are supplier participation (Percentage of Enrollment), Rate of Return, Discount Actualization Rate, and Days Cash on Hand.

• Process Efficiencies: How high is your supplier participation?
  

  This number can speak volumes about the efficiencies of your program. If your goal is to create a program that generates revenue back to the hospital, 35 percent participation indicates a very successful program and is attainable if the process is integrated, automated and efficient. Less than 35 percent means you are doing too much manual work, making this benchmark impossible to reach without improving the process. If your goal is to go “paperless” then your target participation level will be much higher than this.

  If this program has in fact made your AP department more efficient, how are you reallocating your AP’s time? Redesigning a hospital’s workflow, eliminating all the disconnects and redundant paper handling will immediately enhance a company’s bottom line. This translates into soft-cost savings that are difficult to quantify but can have a tremendous impact on your bottom line. Also, better workflow processes mean you can take advantage of early pay discounts that were previously unavailable to you.

Conclusion – A Holistic Approach

As market needs continue to evolve, the key to success will be flexibility and cooperation among buyers and suppliers, who will collaborate to determine which payment method optimizes each partnership. A holistic approach to payment optimization, encompassing a comprehensive set of payment strategies, including ACH, credit or virtual cards (single use accounts) and wire transfer, can be tremendously beneficial for hospitals and vendors of all sizes. This approach not only allows a hospital the opportunity to reduce costs, but can also help to improve margins over time.

Contact Information

Bridget Vanyo
Director of Business Development, Central Region
866.986.1684
bvanyo@inworks.com