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By J. Stuart Showalter
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."
This is a sample article from HFMA's CFO Forum, an online discussion community that encourages networking and sharing among senior financial executives in hospitals and health systems.
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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.
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.
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 (email@example.com).
Leanne Cahill, manager of disbursements, Nebraska Medical Center (firstname.lastname@example.org).
Bill Dinsmoor, CFO, Nebraska Medical Center, and a member of HFMA's Nebraska chapter.
Glenn Fosdick, CEO, Nebraska Medical Center.
Publication Date: Thursday, September 15, 2011
A leader from McKesson discusses how healthcare reform is forcing hospitals and health systems to take a different approach to capacity management and patient flow.
Patient financial engagement is more challenging than ever – and more critical. With patient responsibility as a percentage of revenue on the rise, providers have seen their billing-related costs and accounts receivable levels increase. If increasing collection yield and reducing costs are a priority for your organization, the metrics outlined in this presentation will provide the framework you need to understand what’s working and what’s not, in order to guide your overall patient financial engagement initiatives and optimize results.
Emad Rizk, MD, president and CEO of Accretive Health, discusses the uncertainty facing hospitals and the transitions affecting revenue cycle management.
No two patients are the same. Each has a very personal healthcare experience, and each has distinct financial needs and preferences that have an impact on how, when and if they chose to pay their healthcare bill. It’s no longer effective to apply static billing techniques to solve the complex challenge of collecting balances from patients. The need to tailor financial conversations and payment options to individual needs and preferences is critical. This presentation provides 10 recommendations that will not only help you improve payment performance through a more tailored approach, but take control of rising collection costs.
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This white paper, written by Apex Vice President of Solutions and Services, Carrie Romandine, discusses the importance of patient segmentation and messaging specifically related to the patient revenue cycle. Applying strategic messaging that is tailored to each patient type will not only better educate consumers on payment options specific to their billing needs, but it will maximize the amount collected before sending to collections. Further, targeted messaging should be applied across all points of patient interaction (i.e. point of service, customer service, patient statements) and analyzed regularly for maximized results.
Steve Scibetta, senior director of channel sales for Ontario Systems' healthcare product line, shares insights into effectively managing receivables.
This white paper, written by Apex President Patrick Maurer, discusses methods to increase patient adoption of online payments. Providers are now seeking ways to incrementally collect more payments due from patients as well as speeding up the rate of collections. This white paper shows why patient-centric approaches to online payment portals are important complements to traditional provider-centric approaches.
Elena White, vice president of risk, quality, and network solutions for Optum, discusses how healthcare providers can leverage data and technology as they enable risk in their organization.
Increased electronic engagement between healthcare providers and patients provides significant opportunities for improving revenue cycle metrics and encouraging patients to access EHRs. This article, written by Apex Founder and CEO Brian Kueppers, explores a number of strategies to create synergy between patient billing, online payment portals and electronic health record (EHR) software to realize a high ROI in speed to payment, patient satisfaction and portal adoption for meaningful use.
Somnia President and CEO Marc Koch, MD, MBA, explains how hospitals can drive transformative change in the perioperative experience for outstanding clinical and financial outcomes.
Faced with a rising tide of bad debt, a large Southeastern healthcare system was seeing a sharp decline in net patient revenues. The need to improve collections was dire. By integrating critical tools and processes, the health system was able to increase online payments and improve its financial position. Taking a holistic approach increased overall collection yield by 10% while costs came down because the number of statements sent to patients fell by 10%, which equated to a $1.3M annualized improvement in patient cash over a six-month period. This case study explains how.
PMMC President Roger L. Shaul discusses the effects of healthcare reform on revenue cycle management and how PMMC's products help clients adapt to a changing financial environment.
With the ICD10 deadline quickly approaching and daily responsibilities not slowing down, final preparations for October 1 require strategic prioritization and laser focus.
Greg Burgess, Founder and Chief Product Officer at Burgess Group shares insights and opportunities for payment integrity in the rapidly changing healthcare IT landscape.
Read how Gwinnett Medical Center provides clear connections to financial information, offers multiple payment options for patients, and gives onsite staff the ability to collect payments at multiple points throughout the care process.
Read how Orlando Health was able to perform deeper dives into claims data to help the health system see claim rejections more quickly–even on the front end–and reduce A/R days.
To maintain fiscal fitness and boost patient satisfaction and loyalty, healthcare providers need visibility into when and how much they will be paid–by whom–and the ability to better navigate obstacles to payment. They need payment clarity. This whitepaper illuminates this concept that is winning fans at forward-thinking hospitals.
Financial services staff are always looking for ways to improve the verification, billing and collections processes, and Munson Healthcare is no different. Read about how they streamlined the billing process to produce cleaner bills on the front end and helped financial services staff collect more than $1 million in additional upfront annual revenue in one year.
Effective revenue cycle management can be a challenge for any hospital, but for smaller providers it is even tougher. Read how Wallace Thomson identified unreimbursed procedures, streamlined claims management, and improved its ability to determine charity eligibility.
Before launching an energy-efficiency initiative, it’s important to build a solid business case and understand the funding options and potential incentives that are available. Healthcare leaders should consider taking the steps outlined in the whitepaper to ease the process of gaining approval, piloting, implementing, and supporting sustainability projects. You will find that investing in sustainability and energy efficiency helps hospitals add cash to their bottom line. Discover how hospitals and health systems have various options for funding energy-efficient and renewable-energy initiatives, depending on their current financial structure and strategy.
Health care is a dynamic mergers and acquisitions market with numerous hospitals and health systems contemplating or pursuing formal arrangements with other entities. These relationships often pose a strategic benefit, such as enhancing competencies across the continuum, facilitating economies of scale, or giving the participants a competitive advantage in a crowded market. Underpinning any profitable acquisition is a robust capital planning strategy that ensures an organization reserves sufficient funds and efficiently onboards partners that advance the enterprise mission and values.
The success of healthcare mergers, acquisitions, and other affiliations is predicated in part on available capital, and the need for and sources of funding are considerations present throughout the partnering process, from choosing a partner to evaluating an arrangement’s capital needs to selecting an integration model to finding the right money source to finance the deal. This whitepaper offers several strategies that health system leaders have used to assess and manage capital needs for their growing networks.
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