The Healthcare Hub

COVID-19 Underscores Need for Healthcare Payment Process Reform

Monday, November 2, 2020

The COVID-19 pandemic has changed the financial landscape of the U.S. healthcare system. Hospitals continue to face increased supply and labor expense, decreased revenue from postponed elective procedures, and an increasing number of uninsured patients due to unemployment. The American Hospital Association estimated hospitals were losing $1 million per day in the early days of the pandemic. In addition, most providers have seen a loss of non-operating revenue from their investment portfolios as global financial markets waver due to the economic uncertainty.

Working Capital Challenges

COVID-19 has created a number of balance sheet challenges for providers, the first of which is less working capital. Many hospitals find themselves looking for new ways to cover short-term cash commitments, let alone long-term commitments. In response, some hospitals have opened new lines of credit or increased existing lines of credit. It’s a necessary short-term fix yet one that will affect their financial flexibility in the future. As liabilities increase on the balance sheet, there’s a heightened focus on the debt-to-asset ratio. This all limits an organizations’ ability to provide capacity for future investments, puts pressure on debt covenants and increases cash obligations related to debt payments.

Cash Flow and Revenue Cycle Slow

Patient and payor delays are also wreaking havoc on cash flows. Whether postponed procedures or economic hardship on the part of patients, cash collections have slowed and foretell continued risk of lowered cash collection in the months to come. As uncertainty continues around elective procedures, the typical revenue cycle time from procedure to reimbursement in combination with the increases in overtime, incentive pay, and other COVID-19 related impacts will have a compounding negative effect on cash flow.

COVID-19 Exposes Process Weaknesses

Even before the COVID-19 pandemic hit the U.S., the majority of our nation’s healthcare organizations were struggling with manual, time-consuming and costly payment processes. Data shows it costs as much as $31 to manually process each invoice and paper check, and 42 percent of all payments today are made via paper. Beyond the cost per paper check, the much larger and more significant financial impact of manual processes is payment delays, which lead to lost rebates and potential credit holds.

COVID-19 has disrupted the normal flow of business as employees work from home exacerbating the challenges and complexities of today’s manual payment processes. Those finance teams who were struggling with old technology and processes to get payments out the door before the pandemic struck find their hands tied without a way to access systems remotely or leverage automation for payment processing. As with most aspects of healthcare, financial processes too have been delayed or put on hold.

It’s Time to Automate

The pandemic underscores the importance of rectifying these inefficient processes, which fall to the bottom of the priority list under normal circumstances. It illustrates the need for the industry to embrace new technologies and systems to bring higher levels of automation to its business processes. The result will be stronger business continuity, greater process efficiency, and better, more fluid decision-making around cash management to meet short-term and long-term goals and to prepare for crisis situations. 

Overcoming Barriers to Change

That said, moving to a single, automated solution is complicated. Suppliers and providers have different financial objectives that drive their behavior. All use a variety of solutions with different levels of automation.

It’s common practice for healthcare providers to have relationships with multiple banks. Within those relationships, they use a variety of payment options to maximize cash flow, and that will likely remain the status quo for years to come. What providers lack is a way to aggregate those options, so they are efficient and deliver maximum value. For example, most providers have a credit card or line of credit with more than one bank. The way in which financial institutions process those transactions, and then share data (including format and frequency) varies greatly. This lack of standardization has created a level of complexity that makes it harder, not easier, for providers to make the best decisions to efficiently manage their balance sheets.

This lack of simplicity and efficiency has been an impediment to automation, but there are other barriers within the institution itself, such as alignment and integration of end-to-end business processes. Payments don’t exist in a vacuum. They are tied to invoices and orders. It’s impossible to fully automate payments if the related business processes aren’t also automated and integrated.

With this in mind, the industry must move more aggressively from paper to digital invoices. This shift will optimize the overall process, bringing about automated invoice matching, exemption handling and workflow routing with minimal manual touches. In turn, this enables organizations to seamlessly process purchase orders and non-purchase orders, reducing payment delays and potential credit holds. It also helps providers capture cash rebates from suppliers through early payment or other incentives.

The Path Forward

The intense financial pressure brought on by the COVID-19 pandemic emphasizes the importance of a unified approach to cash management. One of the ways in which the industry can unify and simplify financial management is through an integrated payments platform. Such a platform would provide more standardization and enable providers to balance the variety of payment choices today while improving transactional efficiency and offering visibility to improve working capital. This integrated platform would enable more effective and faster decision support by linking payments data with value-added data from supply chain, clinical and other sources.

Patient care is always the top priority. However, COVID-19 has highlighted long-standing issues in healthcare finance and validated the need to move ahead in improving financial operations and driving improved automation. This ultimately supports the financial health of the hospital and its ability to invest and expand in ways that serve the community. Now more than ever, it’s time for the industry to adopt modern financial management practices to give providers the ability to adapt, innovate and continue to invest to better serve their patients. 

Hear from both a banking and healthcare CFO perspective about responding to impacts of COVID-19 in our recent webinar hosted by HFMA. View the webinar here

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Matt Houston

Vice President