By J. Stuart Showalter
An Omaha hospital's creative solution-forming a separate company to handle automated payment exchange-has improved efficiency, saving the facility about $8 million in cash in the first year alone.
Following the 1997 merger of Omaha's Clarkson and University Hospitals, the newly created Nebraska Medical Center (NMC) had 20 days cash on hand. After the Balanced Budget Act of 1998 took effect, that slim reserve began to shrink even more, and by 2002 it was down to a dangerous 9½ days. That's when NMC's CEO Glenn Fosdick issued an edict: "Hold onto cash as long as you can."
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From P-Cards to HAP-X
Controller Stephanie Daubert and Leanne Cahill, manager of disbursements, took the challenge to heart. They began by holding bills as long as possible and paying as many as they could with the corporate purchasing card (P-card). The P-card's days payable outstanding (DPO) allowed NMC to realize a much-needed cash flow "bump."
Then Daubert and Cahill analyzed their accounts payable records and saw that 80 percent of NMC's "spend" involved about 20 large suppliers. They approached these companies and asked whether they would accept the P-card in lieu of paper checks, but most refused because they would have to pay the "interchange fee" that credit card companies impose.
Mike Carmody, the representative assigned to NMC's account by one of these large vendors, saw that his company's refusal to take the P-card did not help solve the hospital's problem. At a meeting with NMC CFO, Bill Dinsmoor, an idea was born: create an electronic payment system that would serve the function of the P-card without the high interchange rates that make it cost prohibitive from a vendor's standpoint. Dinsmoor and Carmody reasoned that for large spends an automated payment exchange could bring measurable financial benefit by achieving the following.
- Eliminating the need to deal with a credit card company
- Charging vendors half the interchange fee that traditional P-cards charge
- Assuring vendors quicker payment than invoice-based transactions
- Optimizing the hospital's working capital
- Providing the hospital with greater efficiencies and more control over the payables process
- Reducing costs for both the suppliers and the providers
Working with a consulting firm and some financial experts, NMC and Carmody began testing the concept in early 2004. The results were so positive that they formed a separate company late that year and called it "H-Card, LLC." Known today as HAP-X (aka "Healthcare's Automated Payment Exchange"), this innovative company now serves more than 100 hospitals in 32 multi-hospital systems across the country.
"There is no risk, no cost, and a lot of upside," Daubert explained recently as she described how HAP-X works. "Say we get a bill for $100,000 worth of supplies. We send it to HAP-X, and they pay the vendor minus a negotiated discount, which might be 1 percent. The vendor receives $99,000 promptly in electronic format without having to worry about collection efforts. Then NMC receives a statement from HAP-X for $100,000 as though it were a credit card bill. We pay the HAP-X bill on its due date, which is a few weeks later than the vendor's invoice due date would have been. In the meantime, we have use of that money."
Cahill, the AP manager, agrees that it's a win-win-win situation. "HAP-X's revenue is the $1,000 vendor discount which, after costs, is shared with NMC in the form of rebates. In return for providing the discount, the vendor gets paid much sooner and avoids the costs and uncertainties of collection. And NMC gets the float, receives a rebate on its spend, no longer needs to cut paper checks, and avoids the headaches of invoice reconciliation."
In addition, because the entire process is electronic, there are fewer opportunities for human error, and NMC has only HAP-X's payment format to deal with rather than a different one for each vendor.
Costs Saved, Efficiencies Gained
Dinsmoor said that the automated payment system "saved the hospital about $8 million in cash the first year"- the average increase in days payable outstanding (DPO) compared to a 30-day vendor invoice-"and it has continued to save cash each year since as the supply purchases have grown. Plus it generates significant rebates on our spend."
Before the HAP-X system took effect, NMC's days in accounts receivable were higher than the payment period on vendors' invoices. Since they began using HAP-X, the hospital's DPO number has increased and the ratio of receivables to payables is now considerably less than 1. This has had an extremely positive effect on cash flow and on the hospital's bond ratings. NMC has also been able to reduce the staffing level in the accounts payable department by about 10 percent.
The exhibit below reflects NMC's improved days cash on hand.
Access the exhibit:NMC's Days Cash on Hand
NMC's CEO Fosdick is a total believer in the automated payment system, and he believes other CEOs and CFOs should "jump at the chance" to take advantage of automated opportunities. "We were cash poor a few years ago," Fosdick said. "Now, HAP-X saves us money and improves our management of working capital. Plus basically they're paying us to pay our bills for us. What's not to like?"
Displaying his interest in the details and the potential savings, Fosdick pointed out that another benefit of using the automated payment exchange is a reduction in the cost of check processing. "It costs a heck of a lot to cut a manual check," he said, "and this automated process saves us having to write more than 20,000 checks a year. It's all done electronically."
A 2010 study by the Aberdeen Group showed that the cost of cutting a paper check is about $7.15, compared to $3.96 for each commercial card transaction (Pezza, S., et al, The E-Payables Solution Selection Report: A Buyer's Guide to Accounts Payable Optimzation, Aberdeen Group, October 2010). Cahill agrees with those estimates, and she calculates that NMC has eliminated about 20,700 paper checks a year. That being so, the hospital saves more than $66,000 in check-processing costs annually by using the automated system.
All the NMC personnel feel their new system is a prescription for success. "It may seem too good to be true," Fosdick said, "but that doesn't mean it doesn't work."
J. Stuart Showalter, JD, MFS, is a contributing editor to HFMA's Forums.
Interviewed for this article:
Stephanie Daubert, controller, Nebraska Medical Center, Omaha, Neb., and a member of HFMA's Nebraska chapter (firstname.lastname@example.org).
Leanne Cahill, manager of disbursements, Nebraska Medical Center (email@example.com).
Bill Dinsmoor, CFO, Nebraska Medical Center, and a member of HFMA's Nebraska chapter.
Glenn Fosdick, CEO, Nebraska Medical Center.
Forum members: Please add your insights, questions, and comments about this article on the CFO Forum's LinkedIn discussion board.
- Have you benchmarked your working capital performance against your peer group?
- Do you have a working capital optimization strategy for each segment of your supply chain?
- Do you offer a liquidity option to each supplier segment that fits within your optimization objectives?
- Have you analyzed the impact automation tools can play in executing your working capital strategies?
- Do you have an integrated strategy across all solutions from a single provider?
- Are you coordinated in your objectives and approach within your own organization?
Or perhaps you have another discussion starter?
Note: The discussion starters were adapted from Kerwick, G., Dowd, T., and Cassera, B., Prescription for Success: How Two Major Hospitals Reduced Costs, Improved Efficiency & Optimized Working Capital, HFMA webinar, July 27, 2011.
Publication Date: Thursday, September 15, 2011