With all the cost cutting and belt tightening occurring in health care, organizations are constantly looking for opportunities to streamline operations, reduce waste, and save money. In this context, the accounts payable (A/P) function is ripe for improvement. Yet too often, hospitals and health systems are mired in paper, making it difficult to explore opportunities to boost cash flow, build vendor relationships, and increase efficiencies. With this in mind, this HFMA Educational Report, sponsored by American Express, explores ways for improving A/P performance, focusing on possible automation strategies.

Challenges of Paper-Based Systems

Paper is not as efficient or reliable as automated processes. Electronic invoicing and payment allows hospitals to eliminate manual invoice processing and reconciliation tasks, cutting the time it takes to process an invoice while also reducing opportunities for keying error rates. 

Cost also can be an issue. “A paper-based A/P system requires significant labor to print, stuff, and mail checks in addition to considerable supply and mailing costs,” says Van Neinast, senior vice president, IT systems and solutions for United Surgical Partners International Inc. (USPI), a company that manages more than 200 short-stay ambulatory surgery centers and surgical hospitals and frequently joint ventures with hospitals and health systems. “For example, our organization issued more than 1.4 million checks in 2013, which cost us over $500,000 in postage alone.” 

Also notable are business costs associated with locating and storing. When an error occurs, such as data incorrectly entered into the financial system, it can be time-consuming to get physical documents back in-hand to correct mistakes. Also, storing invoices within filing cabinets takes up space that could be used for more productive purposes.

Potential issues related to postal delivery also are a concern. Should a paper check get lost or delayed during mailing, the organization may need to stop payment on the check and issue a new one, which delays payment to the vendor and adds to cost. Waylaid checks require resources to resolve and can delay payment to a vendor.

In addition to the costs and risks associated with issuing checks, there is the time and resources needed to fully reconcile cleared checks on the back end, including generating detailed reconciliation reports. This can be a resource-intensive effort, especially if staff have to track down misplaced or uncashed checks. Payments made electronically can provide the hospital with detailed remittance data, thereby helping to reduce time lost to payment disputes and reconciliation. The hospital also has greater control over when payments are received by vendors. 

In the end, a paper-based process requires a great deal of human intervention, which opens up the risk of error. “At a macro level, we are trying to reduce paper across financial services to limit the number of times people have to touch an invoice, check, payment, and so forth,” says Valerie Dixon, assistant vice president of treasury services for North Carolina-based Vidant Health, which includes eight hospitals, physician practices, home health, hospice, wellness centers, and other healthcare services. “Our goal is to enhance both efficiency and accuracy, allowing us to deliver financial services more reliably.” 

Turning to Automation

Automating aspects of A/P can help an organization overcome many of paper’s challenges. For example, all the supplies, postage, and staffing costs associated with generating, sending, and reconciling checks can be reduced with an electronic solution. Also, fewer people have to be involved in managing the payment process, thereby reducing opportunity for human error.

Several options can support automating A/P. The following describes a few approaches commonly considered.

Buyer-initiated payment. Buyer-initiated payment (BIP) automates a number of key steps in the invoice payment process. Once a healthcare organization’s A/P department receives approval on an invoice, the BIP process can begin. The A/P system creates and sends a payment instruction file to the payment provider that details the suppliers to be paid, the specific amounts, and the recipient’s preferred payment method. The payment provider then disperses the appropriate funds to the vendors. At the end of the month, the payment provider sends a statement to the healthcare organization, detailing the total amount of vendor payments made that month. The healthcare organization then pays the payment provider.

“Essentially, a BIP program allows you to consolidate the payment process,” says Abbey Dal Bello, senior director, finance group at Illinois-based NorthShore University HealthSystem, which includes four hospitals, a medical group with nearly 900 primary care physicians and specialists, as well as lab and pharmacy services. “The payment company pays the healthcare organization’s suppliers throughout the month and accrues charges. Once a month, the organization pays the BIP company, helping the healthcare organization optimize cash flow.”

There are many advantages to BIP:

Cost savings. Depending on the size of the program, the amount of cost savings can be significant. “We are cutting 1,000 fewer checks annually, which has substantially reduced the amount of paper and toner we use, not to mention printer maintenance costs and postage expenses,” Dal Bello says. “Check-printer toner is more expensive than regular printer toner, so limiting the need for that is a big plus. As we bring on more vendors, the costs of generating, managing, and storing paper will drop even more.”

Cash management visibility. Timeliness and tracking of payment processing is an important responsibility of A/P managers, who often must balance the competing needs of maintaining cash flow while complying with invoice terms. When striving to meet payment deadlines, organizations can benefit from improving time wasted to inefficient document hand-offs.

Better vendor relationships. Expedited payment provides an opportunity for organizations to offer more favorable payment terms to suppliers, which can foster goodwill. “As far as our vendors are concerned, the best part of this program is the improved payment terms,” says Dal Bello. “We offer BIP participants payment terms that are substantially shorter than what we are able to deliver for paper.”

One thing to note is that vendors have to pay a fee to use the BIP service, just like they would if they were accepting a credit card. “This fee has been a roadblock for some vendors,” Neinast says. “However, many have found the benefits of receiving payments faster and more accurately outweigh the fee drawbacks, especially since vendors don’t have to process checks or key in remittance detail. Since BIP is totally automated, we know that when we issue our payment instructions, the vendor receives the funds directly into its designated bank account and then receives remittance detail electronically.”

Improved staff efficiency. A BIP program provides an opportunity for an organization to get the most out of staffing resources. “Although we have kept the same number of staff dedicated to accounts payable, they spend less time opening mail, reconciling checks, and filing papers. As such, they are able to devote more time to problem solving and ensuring we meet [cash acceleration] terms,” says NorthShore’s Dal Bello. An automated A/P system also can make it possible for staff to absorb additional work—something that is increasingly needed as organizations onboard new physician practices, hospitals, and so forth.

Efficient reconciliation. BIP can also streamline work on the back end of accounts payable. “We process more than 20,000 payments annually,” says USPI’s Neinast. “There is less reconciliation work when we make payments, because our staff does not need to spend time matching checks to invoices—everything is automated.”

Increased revenue through financial incentives. Some BIP companies offer financial incentives to organizations that pay their vendors via the electronic platform. These programs allow an organization to leverage its current spend to earn financial incentives. “Traditionally, the accounts payable function has generated overhead—supply costs, printing costs, postage, and so forth,” says Dal Bello. “However, with BIP, the accounts payable process can also provide cost savings and rebates from the BIP provider. Basically, it makes paying invoices a more efficient process all around.” 

Purchase cards and virtual payment. Although a BIP program is a good option for electronic payment, there are other alternatives worth considering. “We find it helpful to have more than one electronic option,” says Dal Bello. “Along with BIP, we have a purchase card and a virtual payment program because some vendors have a definite preference and want to use one approach over another. The credit card model works like any other credit card: We pay the vendor using the card so the vendor receives payment right away, and then we receive a statement from the credit card company at the end of the month. Virtual payment is a little different in that we give the vendor a card number and the vendor logs into the system to redeem payment. It’s not as seamless, but some vendors prefer it.”

A credit card program can be particularly beneficial for small dollar-amount purchases or one-time charges. “We have found the purchase card helpful, as it eliminates a lot of paperwork associated with small checks,” says Vidant’s Dixon. “It also cuts down on petty cash reimbursements, which can be tedious and time-consuming. With a purchase card, staff complete transactions at the point of sale, and we don’t have to ‘touch’ the payment multiple times. So, for instance, if someone from our maintenance department needs to purchase a part at a hardware store, we don’t have to set up the store as a vendor, receive an invoice, obtain approval, pay the invoice, reconcile the check, and so forth. The staff member just uses the credit card, and we receive an itemized statement later.”

Despite the advantages of a purchase card or virtual payment program, some organizations opt to pursue BIP alone. “BIP is the only automated option we offer,” says USPI’s Neinast. “Although some of our vendors would prefer to participate in a credit card program, we have found the additional steps involved in managing such a program make it cumbersome. BIP is automated on both sides and runs with no human intervention. Even the error-reporting is automatic—so we immediately know when a payment did not go through.”

Sample of Buyer-Initiated Payment Process

  • Customer makes purchase and approves invoice (invoice processed as normal)
  • A/P system generates pay file and sends to BIP
  • BIP vendor processes all transactions
  • BIP web portal updated with real-time payment information
  • Merchant is sent an email after each payment, and is paid by the vendor A/P system generates pay le and sends to BIP

Source: Adapted by HFMA from American Express Global Corporate Payments processes.

Tips for Getting Started with an Electronic System

Regardless of an organization’s approach to automation, certain key steps can help a new system support efficiency and enable better cash flow. Before selecting an A/P product, keep the following points in mind.

Involve multiple departments. “Automating your accounts payable is not something to do in a vacuum,” Dal Bello says. “We pulled together leaders from finance, purchasing, and IT to assess the benefits of automation, review different possibilities, and outline implementation steps. The purchasing department’s perspective is critical because it holds a lot of vendor relationships and needs to be onboard with the fact that the A/P department is contacting vendors and switching them to electronic payment. IT perspective is essential because those staff members can tell whether a potential system will integrate well with current solutions—network software, existing accounts payable programs, reporting tools, and so forth. They will also play a central role in getting the system up and running.” Finance leaders should closely examine the organization’s current A/P processes and make sure they are sound. By doing this, organizations can more easily overlay technology that can further improve efficiency and accuracy.

Send out requests for proposal (RFPs). It is important to engage in robust due diligence when selecting an accounts payable vendor. At Vidant, leaders pursued an approach that included examining multiple vendors and comparing strengths and opportunities based on the organization’s particular needs. “We sent out RFPs to several of our larger banking partners as well as a national credit card company,” says Vidant’s Dixon.

“Since our broader objective was to automate and centralize invoice processing and put ourselves in a good position for growth, we felt that the credit card company, which already had relationships with more of our vendors, was in a better position to support our goals—the rebates were very much a secondary consideration,” she explains. “Although the banking partners offered a very attractive rebate program, they did not have strong relationships with many of our vendors. Therefore, the volume of our program was expected to be a fraction of the opportunity with the credit card company."

It can be beneficial to quantify, as much as possible, what different providers can deliver in terms of vendor affiliations. “We sent over our accounts payable file to each company submitting an RFP, so they could give us a detailed estimate of the number of vendors and associated funds that could be transferred to automated payment,” Dixon says. “Taking this step allowed us to put some real numbers around the program and set expectations.”

A company’s reputation will also be a factor in the decision. “Ultimately, you want to have as many vendors as you can participating, so you don’t want to partner with a company that vendors aren’t familiar with or don’t trust,” Dal Bello says.

Ask for references. Before committing to an automated payment company, an organization may want to gather references, seeking input from peer organizations that are similar in size and scope. “We reached out to several different hospitals that were using the companies we were looking at,” Dixon says. “We asked the organizations who their top volume vendors were on the automated payment system and compared them with our list. We also asked for feedback on the implementation process and whether the support given by the payment company was adequate to easily onboard new suppliers.”

Although most automated payment companies will be able to supply references, it may be helpful to seek feedback from other organizations outside of those the payment company recommends. “A lot of health systems in our area had successfully implemented this type of program, and they made for a logical place to search for information,” Dal Bello says.

Once an organization chooses an A/P system, there are a few implementation steps worth considering:

Update the master vendor file. Before starting to implement an electronic process, it is important to have accurate records of current vendors. “Especially with the many mergers and acquisitions occurring right now, it can be difficult to know exactly who your vendors are and who they are affiliated with,” Dal Bello says. “As such, it is crucial to create and maintain a master vendor file. It’s important to make sure you search for duplicates, tax ID redundancies, inactive vendors, and other sources for error. Having a clean and non-duplicative file will not only help implementation go faster and smoother, but it will more easily support the program going forward.”

Reach out to vendors. As mentioned before, the key to success with automated payment is having vendor support and participation. “Some vendors will commit overnight and some will take longer, requiring in-depth discussions,” Dal Bello says. “Before we began offering our BIP program, we engaged in a campaign to make vendors aware of the opportunity and encourage them to get on board. To start, we sent a letter to all our vendors, detailing the benefits of participation. Within the letter, we told them we would be contacting them via phone to facilitate setup. This marketing campaign resulted in a lot of support up front, with several hundred vendors signing up right away.”

Reaching out to vendors should be a collaborative effort between the healthcare organization and the provider of the electronic solution. Some payment companies will even offer advice or resources to aid in effectively communicating about the project with vendors. “We used a sample letter and customized it to fit our culture,” says Vidant’s Dixon. “This approach helped us set the tone for the request, and we were able to make sure the communication reflected our goals and objectives.” In addition to assisting with vendor marketing, the payment provider should be willing to work directly with vendors to answer their specific questions and troubleshoot problems.

Provide comprehensive staff training. Although automated payment systems are not overly complex, some degree of training is required. Topics to cover include the drivers for an electronic system, staff responsibilities with regard to the program, and ways to address problems that arise. “We have a distributed accounts payable process in each of our 200-plus surgery centers, so we had to train each facility in how the BIP program worked,” says USPI’s Neinast. “In particular, we wanted staff to be comfortable answering vendor questions, since a vendor will reach out with a problem to the facility where payment originated. Fortunately, the training was fairly straightforward. We were able to get everyone up to speed using a conference call and a few webinars.”

Communicate expectations to the team. In addition to training, organizations should keep staff informed about implementation and next steps. “It’s important to communicate project status to the staff, especially in the finance department, so you can help them prepare for the change,” says NorthShore’s Dal Bello. “It is also helpful to make the entire company aware of the new program, because you never know who in the organization might have a relationship with a vendor in a capacity beyond direct purchasing and might encounter questions. Also, by keeping the whole organization in the loop, you can encourage staff to assist with getting vendors onto the payment program. In the course of their interactions, if they can point out the value of the payment program and the advantages to the vendor, it can support the work of the accounts payable department and the payment company in getting new suppliers enrolled.” 

Meet frequently with key stakeholders. IT, finance, and purchasing should meet frequently with the electronic payment provider before, during, and after go-live to assess progress and troubleshoot issues. “For the first 90 days after we launched our BIP program, we met weekly via conference call,” says Vidant’s Dixon. “Then we met biweekly, then later monthly, over the next 12 to 15 months; and now we review the program annually at a minimum. Additionally, we have been pleased to have access to training and support whenever we are either implementing a new feature or adding a new department for the purchase card program. Structuring meetings this way has helped ensure a smooth process and allowed us to proactively identify and resolve potential problems." 

Continuously work to bring new suppliers onto the system. It is most efficient for healthcare providers to onboard as many suppliers right from the start. If this isn’t possible to do en masse, then focus should be on prioritizing those in the best strategic interest—highest volume or frequency of transactions, for example. 

Regardless of the organization’s initial progress, vendor recruitment should continue to be a top focus. “We are constantly working with our payment company to bring new suppliers to the program,” says USPI’s Neinast. “Although some did not initially embrace the system, many vendors are coming around as they’re seeing the others move toward automation.” 

Electronic Invoicing

In addition to offering electronic payment, organizations may want to automate more upstream accounts payable (A/P) processes. For example, electronic invoicing can facilitate A/P efficiency, reducing the amount of paper entering an organization and allowing for improved record keeping and information management.

Electronic invoicing systems also support faster invoice processing and approval, because people can access and interact with the invoice more quickly than with paper. When used in conjunction with electronic payment, electronic imaging systems can further streamline reconciliation and encourage enhanced cash flow forecasting.

“We have substantially reduced paper in our invoicing, and instead are using an imaging process,” says Abbey Dal Bello, senior director, finance group at NorthShore University HealthSystem. “As a result, we can pull up an invoice image in seconds instead of hunting through file cabinets or larger storage areas. We also don’t need to pay for storage facilities or to destroy old invoices. Our goal is to have as many vendors as possible sending electronic invoices, either via email, EDI [electronic data interchange], or—if they can’t do one of the previous two methods—fax. On the whole, we are doing everything we can to avoid receiving paper via snail mail. If a paper invoice does come in, we scan it into our imaging system and destroy the paper within 90 days.”

Automation: Setting the Stage for the Future

Automating the A/P function is becoming more than just a good idea. In fact, it can help with effectively navigating emerging payment models, remaining competitive, fostering supplier satisfaction, keeping costs in check, and supporting greater efficiency. Taking a well-considered approach to onboarding an automated A/P system can help an organization improve its current performance and remain nimble as the healthcare landscape evolves.

Our Sponsor Speaks

Identifying the Right Payment Solution and Engaging Suppliers

Tom Tierney, senior vice president of Global Corporate Payments, U.S. Sales, American Express, discusses factors to consider when researching payment vendors and strategies to get suppliers on board. 

Q: When researching new payment solutions, what is a helpful first step healthcare organizations can take?

Pursuing a new payment solution is a big decision and should be planned carefully. It can be helpful to reach out to peers within your industry to understand the solutions they are using and how well it serves their needs. Also, research which payment solutions have a high acceptance rate among your suppliers. The more suppliers that participate.the more efficient the healthcare organization’s A/P processes can be.

Finally, a payment vendor with strong relationships with your suppliers may be well-positioned to negotiate better terms on your behalf.

Q: How can healthcare providers encourage suppliers to move away from paper-based processes?

When healthcare executives discuss various automated payment options with suppliers, recognize that not everyone will be ready to move away from paper-based processes. However, automation can benefit both the healthcare organization and its suppliers. Some benefits to suppliers that you can highlight include potential reduction of DSO* (days sales outstanding), reduced invoicing and collection costs, elimination of lost or intercepted paper checks, or online access for payment tracking. Also, keep conversations with suppliers ongoing. Suppliers are growing more comfortable with efforts to automate and increasingly are interested in exploring their options. Growth in supplier participation will help the healthcare industry transition to automated payments.

*Reduction in DSO will depend on individual provider payment behavior. DSO may increase in certain instances.

Source: American Express


Publication Date: Sunday, February 01, 2015