Jan van Londen
Paul Zimmerman

CFOs can find opportunities in their own department processes to reduce costs and improve financial performance.


At a Glance

Hospitals looking to reduce cost and improve performance in financial services should focus on these areas:
 

  • Treasury banking services costs and fees  
  • The possibility of a revenue-generating vendor payment solution  
  • The accounts payable process  

Hospitals commonly adopt cost-cutting initiatives to reduce bottom-line expenditures and improve financial performance. Typical targets include physician preference items, energy costs, clinical supplies, commodities, and discretionary items. However, CFOs might overlook savings opportunities in their own backyard: the finance department.

CFOs don't often view the finance department as an area rife with bottom-line savings opportunities. But by breaking free of long-held traditions about their business processes and practices, and applying the same analysis to the finance department that is used successfully in other parts of the organization, finance executives can save significant amounts of money, and in some cases even generate revenue.

Three key opportunities for cost savings and performance improvement in financial services are:

  • Lowering treasury banking services costs and fees
  • Implementing a revenue-generating payment solution
  • Reducing the cost of the accounts payable (A/P) process

Cost-Savings Opportunities in Treasury Banking Services

Banking services are not usually treated the same as other purchased services. They are frequently exempted from competitive bidding and negotiations, and do not undergo rigorous analytical review, despite their often significant costs. Usually, banks are viewed as partners with an indefinite relationship, rather than as service providers whose contracts should be periodically reviewed.

Recently, factors such as consolidation in the banking industry, new laws limiting revenue from credit cards, and shifts in the real estate market have increased the competition for new treasury banking clients. Banks are now more willing to reduce or eliminate certain fees, provide advisory services, and negotiate other terms.

Improvements in technology and information security have greatly expanded both the number of banks capable of working with hospitals and the tools and services those banks offer. These tools and services include outsourcing invoice payment functions, using advanced lockbox services, and implementing electronic reconciliation of payments. Such services can help reduce costs, improve the efficiency and productivity of the finance department, and remove high-volume, low-value work from hospital staff.

Banking services are often overlooked as an area of opportunity for two reasons: lack of visibility and the special relationship banks have with their clients.

Lack of visibility. Few people outside the CFO's office know the overall cost of treasury banking services. Typically, there are no invoices for banking fees; they are simply deducted from hospital accounts each month. Interest rates and investment strategies for cash holdings are not typically shared outside the finance department.

Special relationship. Management tends to view the bank as different from other vendors. Banking services are viewed as untouchable because of financial and credit arrangements, charitable giving performed by the bank, the high level of the relationship in the organization, the complexity of changing banks, and the critical nature of many of the services provided.

However, although these factors may make the process more complex, they do not preclude treasury banking services from being a great opportunity to drive bottom-line impact for a healthcare organization.

Benefits and costs. When healthcare organizations evaluate treasury banking like a typical service contract, they find the market extremely competitive. With a large number of regional and national banks offering sophisticated services and tools, enough qualified vendors exist to create competition in any market. When banks compete, their different cost structures and approaches can generate unique and aggressive bids. Their offerings can include reduction in FDIC fees, preferred earnings credits tied to market rates, declining fees as deposits rise, and free treasury banking services with a minimum cash balance.

However, some organizations-citing the importance of their banking relationship in credit markets, capital purchase financing, and other areas-have chosen not to put their treasury services into a competitive bid situation. Even these organizations can realize considerable savings by simply reviewing the details of their current treasury services with the bank's representative, who can provide perspective on the best practices of other clients, and can indicate where current treasury processes may be antiquated or valuable tools are not being used. The representative may be able to identify unnecessary services and fees, and explain obscure fee descriptions.

Changing banks is not simple, and it typically takes at least 90 days of preparation. However, it is no more daunting in size, scope, and complexity than changing vendors in food service, dialysis services, or clinical engineering.

Case Example: Reviewing Treasury Banking Services

A midsized community hospital, through a rigorous review of treasury processes and an eventual competitive bid for treasury banking services, was able to reduce annual fees by 60 percent and increase earnings by 33 percent. Before the bidding event, the treasury department performed a detailed review of its banking fees, eliminating services that were no longer needed. In addition, as part of negotiations with each bidder, the hospital asked the bidding banks to review the hospital's current treasury processes and recommend changes to reduce costs and increase efficiency. The combined net impact saved the hospital more than $200,000 per year and allowed it to reduce cash deposits to offset fees by more than $35 million. Consequently, the hospital was able to work with its bank to develop a short-term liquid investment strategy for the excess cash.

Revenue-Generating Payment Solution

A growing number of hospitals are using technologies from a third party, usually a bank, to automate payments to vendors, reduce staff time, and earn rebates. Several national and regional banks offer this type of solution.

Although these offerings vary somewhat, they all streamline the payments from healthcare providers to vendors through the use of a VISA, MasterCard, or American Express "ghost card" assigned to each vendor. Vendors send their invoices as usual, either electronically or on paper, to the hospital's A/P department. The invoice is entered in the A/P system, approved by the requestor, and scheduled for payment. However, instead of printing and mailing checks, the hospital sends an electronic payment instruction file to its partner bank. This payment file includes the payment amounts for all vendors scheduled to be paid within the billing cycle.

Once the bank receives the payment instruction file, it sends a notice, or remittance advice, to the vendors notifying them that the money is available. Each vendor then uses its virtual credit card to pull the money into its bank account. At the end of the billing cycle, the bank sends the hospital a statement, which includes all the payments the bank made to the vendors during the billing cycle. The hospital then has a grace period, typically between three and 10 days, to pay the bank, usually through an automated clearinghouse (ACH).

The program's success rests on signing up vendors, which is typically done by the bank and can take up to two years before the program is at full potential. The biggest impact comes from focusing on the largest vendors first. Typically between 10 and 20 percent of all A/P vendor spend can be managed through the program. Besides enrolling existing vendors, many hospital purchasing departments are starting to make these programs their standard method of payment for any new vendors.

Benefits and costs. Vendors are paid an average of three to seven days faster than through traditional check, and the use of the "ghost card" eliminates manual check processing. Also, the remittance advice sent to the vendors contains more information than the vendor typically receives with a check payment, such as the invoice and purchase order numbers. In return, vendors pay a fee of 2 to 3 percent on each transaction. The proceeds from the fees are split among the bank, the credit card company, and the healthcare provider.

The rebate can be a significant benefit for healthcare providers, which typically receive 50 to 75 percent of the rebate money. Their share varies based on the annual volume through the program and the length of the billing cycle. (Billing cycles typically range from seven to 30 days. The shorter the billing cycle and grace period, the higher the rebate.) For instance, a 300-bed hospital with a total A/P spend of $150 million per year runs about 15 percent of its spend through the program and receives a rebate of 1.3 percent, based on a seven-day billing cycle. In this example, the rebate generates $292,500 in extra annual revenue.

There is some small initial cost for the hospital in setting up the program and testing the remittance file. Large healthcare systems using this type of program may need to dedicate an A/P resource to resolve payment discrepancies and coordinate with bank and vendors.

Not all vendors will be happy to participate, especially distributors and wholesalers, which often have low profit margins, and vendors that already use ACH payments. Fortunately, many vendors accept such programs despite the associated fees. They may see participation as an opportunity to automate their cash receipts or gain additional business. If vendors resist, a call by the CFO or purchasing director to explain that this is the new way the hospital pays its vendors may help. Sometimes it is necessary to offer more favorable payment terms to a vendor. Another approach is to move vendors to longer payment terms if they do not sign up.

Case Example: Implementing an Automated Payment Solution

A large multihospital system signed an automated payment solution (APS) agreement with its existing bank in September 2010. After testing the A/P payments export file and creating vendor enrollment kit documents, the bank started enrolling vendors in November. As of February 2011, 220 vendors had been enrolled, and 132 of them were live on the system. The annualized APS volume is up to $60 million, and the associated rebate to the health system, which is paid monthly, adds up to approximately $750,000 in annual revenues. APS volumes and rebates are expected to rise further over the next 18 months and level off at approximately $2 million.

Exhibit

f_londen_exh1

Reducing the Cost of the A/P Process

The cost to process one invoice from receipt to payment varies widely among hospitals. Different studies have shown that the cost ranges from a low of $2 to a high of more than $15. Most of this cost is labor, and the rest is associated with materials and mailing.

Many A/P departments still process a large volume of paper invoices and send paper checks. Time is spent receiving invoices, sorting, entering invoices in the A/P system, getting approvals for payment, reconciling invoice discrepancies, and processing checks. Each of these activities can be streamlined in a way that reduces costs.

Replace manual keying with electronic data interchange (EDI). A/P staff still manually key in the vast majority of invoices. Hand-keying an invoice takes four minutes on average-time that can be saved by using electronic invoice entry through an EDI 810 transaction. This allows the invoice to be electronically received into the hospital A/P system without data entry. If a hospital switches 25 percent of its highest volume vendors to EDI, it can eliminate 75 percent of manual invoice entry activities, and potentially reduce A/P staffing hours by 30 to 40 percent.

Increase the percentage of invoices that have associated purchase orders (POs). Up to 40 percent of invoices typically don't have an associated PO, and therefore require A/P personnel to spend time getting approval from the requestor. They must scan and email the invoices to the requestors for approval. Sometimes it is difficult to find the right requestor, or A/P does not hear back and has to send reminders. The more invoices can be moved from "Non-PO" to "PO," the greater the time-saving automation opportunity.

Use an automated clearinghouse to pay vendors and employees. Printing and mailing checks costs an average of $0.50 to $0.75 each for handling, paper, ink, and postage. Using ACH transactions to pay vendors and employees eliminates this cost and speeds up the payments. With ACH, a receiver (vendor or employee) authorizes an originator (hospital) to issue a credit to a bank account. This method is popular for employee paychecks and reimbursements but is still not widespread for vendor payments. It requires the mapping of the electronic transaction between the customer's A/P system and the vendor's A/R system. Approximately 30 percent of hospitals have implemented ACH with their largest vendors, although they continue to pay others with paper checks.

Use purchasing cards (P-Cards). P-Cards are an effective tool for purchasing a variety of items, and can be used to reduce the number of low-value invoices and invoices from infrequently used vendors. In addition, P-Card programs typically rebate a percentage of total purchases back to the hospital. However, P-Card programs do present risks, and hospitals must be willing to devote significant resources to managing and monitoring them. P-Card programs that are not closely managed tend to grow beyond their intended purposes and create an easy avenue for spending outside of preferred agreements, as well as fraud and abuse of delegated purchasing authority. As a result, both department managers and finance should closely review monthly charges to identify any inappropriate merchants or items, and if necessary, provide feedback to the P-card holder.

Benefits and costs. The biggest benefit of the four activities outlined above is the reduction in A/P labor cost and some potential cash rebate. However, to get these measures in place requires effort. To receive invoices electronically, the EDI 810 transactions coming from the vendors need to be mapped to the A/P system. Depending on the type of A/P system and the number of vendors included, this could be a considerable IT effort. Increasing the percentage of "PO invoices" and expanding the use of P-cards do not require IT effort but will require the cooperation of end users, purchasing, and the A/P department. It is important to create a cross-departmental team that establishes clear criteria and policies for what should be bought with purchase orders and on P-Cards.

Case Example: Reducing Cost of A/P Process

A 250-bed hospital in the Northeast processes approximately 50,000 invoices per year. Before it streamlined its A/P processes, the cost to process each invoice was approximately $4.50. After the hospital implemented EDI, increased the number of "PO" invoices, and expanded the use of P-cards, it was able to cut its invoice processing cost by 40 percent, for a savings of $90,000 per year.

Opportunities Abound in the Finance Department

The health system finance department can be rich in opportunities for trimming costs, and sometimes even for generating revenue. These opportunities go beyond the three examples here: Don't be afraid to take a look at insurance cost, payroll outsourcing, or business office effectiveness as well. Assessing and improving your own department's finances can not only improve your institution's fiscal health, but also set an example for other departments to follow.


Jan van Londen is a senior director, Huron Healthcare, Chicago, and a member of HFMA's Maryland Chapter (jvanlonden@huronconsultinggroup.com).

Paul Zimmerman is a manager, Huron Healthcare, Chicago (pzimmerman@huronconsultinggroup.com). 

 

Publication Date: Thursday, March 01, 2012

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