As with many other industries, like manufacturing and retail, the healthcare industry is looking to leverage information technology to transform financial payments and automate the posting of accounts payable and accounts receivable processing systems.
Other industries seek to automate “supply chain management.” In healthcare we seek “administrative simplification” in the processing and posting of payments from payers to providers. The search for new ways to increase efficiency, flexibility and convenience has led to the current set of payment/remittance distribution options, which fall into three categories:
- paper checks;
- ACH (automated clearing house) transactions; and
- virtual card payments.
Which method to choose? For most providers, the answer is some combination of the above. Though the payment industry may at some point implement a single solution that meets the needs of payers and providers alike, in all situations, most providers today are best off matching payment options to payers according to inherent characteristics like the ones described below.
Paper checks
Paper checks are the most common form of payment in the healthcare industry. This payment method’s popularity is due to transaction simplicity; the only requirement for the provider is to have a bank account where the checks can be deposited. The check comes in the mail and the recipient deposits it. Simple, but it long ago ceased to satisfy all payment situations and it comes with expense that isn’t always obvious.
One reason we have alternatives to paper checks is the manual paper based processing – open the mail, record, endorse, create a deposit, make the deposit and manually post the detailed remittance information. Unfortunately, the simplicity of paper checks comes with all the logistical inefficiencies and related expense of manually processing the paper payment. But their cost can be even greater when you consider that paper checks are also the form of payment most susceptible to fraud. For instance, someone can easily intercept a check and alter the “pay to” instructions and the payment amount. These forms of theft are as old as paper checks themselves.
Considerations: The degree to which providers favor paper checks depends on their appetite for manual processing and tolerance for fraud potential. Like businesses in many other industries, healthcare providers increasingly prefer to limit check payments to payers who make only occasional, smaller payments.
Automated Clearing House (ACH)
The oldest and most proven form of electronic payment available to providers is ACH. ACH payments have many positive attributes. ACH payments are relatively faster and less expensive and require less manual processing than paper checks.
However, the trade-off for ACH payments are front-end set up and IT expenses. In order to enable ACH payments a provider must give each payer their bank account information. For various reasons, providers may not want to give their bank information to hundreds of different payers. Depending on their accounts receivable system, providers may also incur significant upfront IT costs in preparing and testing the electronic remittance advices before they can automate posting from electronic files provided by each payer.
Even after this is accomplished, ACH payments still require the provider to put processes in place to insure the funds have transferred before posting the remittance information associated with the payment. For many providers this means that the processing of ACH payments remains only semi-automated even after the IT work is performed to implement the electronic payment and remittance.
Considerations: Even though ACH payments are attractive, because of the upfront considerations, ACH may be a good alternative for some providers but may not be the right alternative for others. Any given provider may decide that they should enroll for ACH payments for some payers and not for others.
Virtual card payments
The newest entry among payment options, virtual card payments that leverage payment card infrastructure, are gaining acceptance as replacements for paper checks. Explanations of Payment are mailed along with card payment information, which providers enter into their point-of-sale (POS) terminals to initiate deposits into the provider’s merchant account.
Virtual card payments require no enrollment and no action beyond terminal entry of the card information. Like other card payments, virtual card payments leverage the card industry’s stellar fraud detection and protection programs. Most payers implement virtual cards as direct replacements for checks. In the same way that providers never opted in or enrolled to receive checks, providers do not need to enroll or opt in to receive virtual cards. Providers are charged for these payments by their merchant services provider the same way they are charged for any card payment.
Considerations: Virtual card payments are the newest form of payment in the healthcare industry. Like other forms of payments, virtual card payments may be suitable in certain situations and not in others. Providers can accept them when they make sense and opt out when they don’t. Because virtual cards are usually implemented by the payer as a direct replacement of a check, providers have the option to either process the virtual card or opt out of receiving virtual cards.
Coming soon: “Straight-through processing”
The payment industry’s evolution will likely accelerate as new technical capabilities come to market. Now that virtually all payment-related data is digital, it really is possible to move toward systems that will make current payment options seem quaint.
In particular, look for new remittance solutions that build upon existing infrastructure with streamlined enrollment and remittance distribution. For example, systems that leverage merchant acquirer relationships can potentially eliminate the need for enrollment or the sharing of bank account information. These systems have the potential for advanced capabilities of ensuring that the payments are deposited into the merchant account that eliminate reconciliation processes and provide extremely tight controls.
Considerations: Assuming that future straight through processing options simplify enrollment, automate reconciliation of the payment and the remittance data and accelerate payment, providers may find this payment method attractive. Like other forms of payment transactions, straight-through processing would have merchant fees associated with it, so providers would need to weigh that cost against benefits gained to decide under what scenarios it make sense to accept this method of payment.
It’s great to have options
The longevity of the paper check is a reminder that each truly workable payment option has its place. The appearance of optional payment methods is a reminder that payers and providers need the ability to pursue the best payment models for their needs. There are expenses associated with each payment modality, but cost is only one consideration among several that include convenience and the nature of individual payer-provider relationships.
One provider may find it best to stick with checks for all but a handful of major payers, which it engages with ACH. Another provider might develop a process for managing virtual card payments efficiently and prefer them to checks. What one provider’s system handles well, another’s may not, and it’s all influenced by differences as seemingly small as the features of a practice management or accounts receivable system. In a world where one size doesn’t yet fit all, it’s great to have options.