Perspectives 2019 2020 Public Sector

94 How Not-For-Profit Healthcare Organizations Can Optimize Cash in the Age of Industry Disruption Although many hospitals and healthcare organizations have moved away from paper-based payments in recent years as part of broader efforts to digitize healthcare delivery, high volumes of checks continue to be used compared with other sectors. In 2018, healthcare organizations could have saved $12 billion annually by moving from manual to electronic transactions, according to CACQ, a non-profit healthcare alliance. 6 As well as focusing on B2C payment flows, treasurers, CFOs, and procurement officers should scrutinize B2B accounts payable relating to administrative and supplies costs, which are a significant element of overall cost. Citi estimates supply expenses represent roughly 15% of total hospital expenses while industry research indicates that expenses can be as high as 40% in hospitals with a high case-mix index, such as surgery-intensive hospitals. 7 According to the Department of Health and Human Services, nearly a third of every dollar spent on healthcare in the United States is consumed by administrative/back-office expenses. Organizations that manage these costs will realize healthier profit margins, increased days cash on-hand and improved working capital metrics. Ratings agencies will view such developments favorably given the current challenging revenue environment. Strategies to lower costs and extend DPO With NFP healthcare expenses expected to continue to outpace revenues for the foreseeable future, organizations need to consider treasury tools that reduce costs and extend DPO. Reducing paper checks has been at the forefront of corporate treasury priorities for over a decade and NFP healthcare treasurers are following suit. Check volume can be reduced by using purchase and virtual cards, ACH, or supplier finance payments. A first step in evaluating accounts payable expense is to conduct a working capital analysis of accounts payable. A file of annual payments can be reviewed by relationship banks or via an RFP to identify the 15%-35% of suppliers that can accept credit cards. Given that the average company makes an estimated 41% of its payments to major suppliers via check (according the 2016 AFP Electronic Payments Survey) 8 there is a significant opportunity when moving to electronic payments. Virtual cards have become increasingly popular in healthcare in recent years and are now used for a wide variety of expense items including medical devices and supplies, telecom equipment, and even items typically purchased via group purchasing organizations. As the name suggests, virtual cards generate a unique “virtual” credit card number for each payment and enable spending and reconciliation controls to be set for each transaction. Payments can be made individually or via a batch file. A major benefit of card-based payments is the opportunity to earn cash rebates equivalent to between 0.50% and 2% — delivering up to $4 million in rebates for a $200 million spend — depending on an organization’s accounts payable vendor data. Supply chain finance: benefits for buyers and suppliers Supply chain finance (SCF) is an alternative to card- based payments that enable businesses to lengthen their payment terms to their suppliers while allowing suppliers to elect to be paid early. Banks or third-party vendors provide web-based SCF platforms to facilitate these payments. SCF (also known as reverse factoring) is an extension of the buyer’s accounts payable and not typically considered financial debt. For a SCF program to be successful, treasury, finance, procurement and accounts payable teams must work collaboratively. For the supplier, SCF represents a true sale of receivables. It provides value for firms of all sizes and credit ratings, including SME suppliers (which maintain the flexibility to request discounting at any time during the life of the transaction). Suppliers have the chance to get paid early, with faster, simpler access to cash at beneficial rates, strengthening the healthcare supply chain. SCF can benefit service-oriented healthcare businesses — such as medical transcription services, medical supply companies, medical staffing agencies, temporary nurse registries, outsourced medical coding companies and medical billing services — as they do not bill third-party payers. Instead, they bill the hospitals or healthcare facilities directly. 6 CAQH, “2018 CAQH Index — A Report of Healthcare Industry Adoption of Electronic Business Transactions and Cost Savings” 2018:1-37. https:// www.caqh.org/sites/default/files/explorations/index/report/2018-index-report.pdf 7 Y. Abdulsalam and E. Schneller, “Hospital Supply Expenses: An Important Ingredient in Health Services Research” Medical Care and Research Review, (2017): 1-13. https://www.ncbi.nlm.nih.gov/pubmed/29148349 8 Association for Financial Professionals, “2016 AFP Electronic Payments Survey” 2016: 1-43. http://www.socalafp.org/documents/ news/2016EPaymentsReportFinal.pdf