Plastic Pays for Healthcare, Too

It’s estimated that 79% of all invoices are still paper in the accounts payable departments and manual checks are issued 63% of the time. But this paper- and labor-intensive process often prevents hospitals and health systems from attaining hundreds of thousands of dollars in contracted prepayment discounts.

Most finance leaders are aware that they are missing out on hundreds of thousands of dollars in savings, so to offset that, they have taken a cash management strategy that involves trying to capture interest off of the float—though it typically yields a paltry 1% return.

However, when a hospital pays invoices early, it reaps even greater returns. Consider, for example, an early-payment discount on a 2/10 net 30, where the hospital can take a 2% discount by paying before the 10th of the month on a bill due the 30th: It will earn an annualized percentage of 36.5% for the hospital, significantly higher than the interest on float.

The challenge, however, doesn’t come from a desire to actualize these early-payment discounts; rather, it is how to get the A/P department to move swiftly enough to get the payments made in time. With thousands of vendors and invoices, it may seem all but impossible to hit all the varying contracted prepayment deadlines. Not so, however: The solution is as simple as a credit card.

In 2008, Danbury (CT) Hospital was approached by American Express to consider this proposition, explains Donna Kaplanis, controller for the 371-licensed-bed not-for-profit hospital. The first challenge Danbury Hospital had was to get its vendors onboard and willing to accept a credit card for payment. The system ran a spend analysis to identify which vendors it used most frequently and what the early-payment discounts would be if it was able to pay more swiftly. After determining which vendors would offer the greatest return, Danbury worked to get them to accept the credit card.

“We needed to take a fresh look at how we do things because the old way may not be the most efficient,” she says. “This made us change some processes, and the benefit is seeing where your savings translated into real dollars.”

After four months of implementation, the program went live in February 2009. In the first year, the program was a success. Danbury Hospital charged more than $42 million in supplies and services on the card and earned early-payment savings of over $387,000—all for doing nothing more than paying
its invoices with a credit card and then making monthly payments to American Express.