HEALTHCARE CLAIMS PAYMENT OPTIMIZATION: 7 THINGS TO CONSIDER

Executive Summary

In the game of healthcare payments, the idea is not to spin perpetually around the board, but to land on the finish line in the least costly and most effective way possible. But too many healthcare payers are simply “rolling the dice” on these outcomes instead of making calculated, analytical decisions on what the best mix of payment options should be for them and their providers. Illustrated by a board game, this paper presents a methodology to determine an optimal healthcare payment mix that depicts logical branches where payment by check, Virtual Card, or Automated Clearing House (ACH) is specified by quantitative criteria measured against objective thresholds. The analysis considers industry regulation, readiness, adoption concerns, benefits, costs and complexity that maximizes the mutual benefit of healthcare buyers and suppliers.

Provider requests ACH CCD+

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Healthcare Claims Payment Optimization: 7 Things to Consider

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THE HEALTHCARE PAYMENTS GAME

The current pace of change in healthcare and in healthcare payments is unprecedented. The general drive to cut costs, while complying with Affordable Care Act (ACA) operating rules is altering the healthcare payments landscape. As of January 1st, 2014, when healthcare providers request it, payers must use the ACH CCD+ (Cash Concentration or Disbursement) format. This is the standard mandated by ACA operating rules, enabling re-association of the EFT (Electronic Funds Transfer) and the ERA (Electronic Remittance Advice).

While ACH is an efficient, reliable payment method, the majority of healthcare payments are still made via check with the use of Virtual Cards is increasing. All three methods will continue to be part of the payment mix for the foreseeable future. In fact, an optimal strategy will employ all three payment methods. The key is knowing when to employ each. Ultimately, the payment method should be mutually agreed upon by and mutually beneficial to healthcare trading partners.

Currently, as a percentage of payments, checks dominate.

Small providers will have the most difficulty moving away from receiving checks. As ACH and Virtual Card payments increase, check acceptance will decline, even for small providers.

With multiple payment options, how can healthcare payers determine their optimal payment mix? To keep it interesting, let’s visualize the process using the analogy of a good old-fashioned board game. Games like Monopoly and Life taught us that our decisions impact our financial success. Real-life payment decisions are a bit more complicated, but ultimately the goal should be to minimize cost, maximize process efficiency, and have a positive impact on payer-provider relationships. So let’s look at one example payment game-plan, with particular emphasis on the decision points on the game board.

First, as a foundation, it will help to discuss the pros and cons of each payment method in the context of industry goals, regulation, and preparedness. Then we will be in a good position to consider the details of creating a payment strategy and selecting a payment method mix.

64%

59%

14%

22%

9%6% 13%

14%

Checks ACH Wires P-Cards

Healthcare Other Industries

Paystream Advisors, Healthcare ePayables, Curing Inefficiencies in the Healthcare Payments Market, Q2 2013.

371

316

103

360

323

113

349

343

124

387

335

137

443

318

150

e2012 e2013 e2014 e2015

Small U.S. Healthcare Commercial Remittance Transactions by Payment Type, 2012 to e2016

(in millions of transactions)

e2016

Paper check ACH Payment card

Aite Group, Healthcare Remittance Payments: Sizing the Small-Provider Market, March 12, 2013.

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Healthcare Claims Payment Optimization: 7 Things to Consider

PROS AND CONS OF PAYMENT METHODSCheckIncreasingly, checks are viewed as an outdated payment method: Inefficient. Expensive. Not green. But here’s what checks have going for them: they work and people know how to use them.

ACHACH is known to be reliable, efficient, and cost effective, but considerable administrative and technical investment may be required for some providers to see these benefits.

Check Pros

Universally Accepted: de-facto default payment method.

Technology: no specialized equipment or expertise is required.

Check Cons

Slow: time for printing, mailing, transit, deposit, and posting.

Less Secure: prone to fraud, and payment not assured.

Expensive: most costly payment method for payers and providers.

Inefficient: processing checks is manual, time consuming, and costly for payers and providers.

ACH Pros

Efficient: can enable full electronic (straight through) processing when systems and trading partners are fully configured to implement and take advantage of the ACH CCD+ format.

Reliable: ACH has been around for years and, once implemented, is highly reliable.

Cost Effective: transaction fees vary, but are generally low.

ACH Cons

Not Free: the provider’s bank may charge fees to provide ACH CCD+ healthcare data.

Cost of Implementation: the payer must be able to provide the right data in the right format, and the provider must be able to consume it, re-associate it, and make sense of it. IT resources, testing, and project administration should be considered when evaluating costs.

Competing Priorities: ICD-10 code standardization1 and other mandates may make implementation impractical.

Enrollment: campaigns to sign up trading partners require resourcing and investment and need concerted, sustained effort. Suppliers may be reluctant.

Financial Privacy: providers must be willing to share banking information, which payers and providers must store and update.

1 Electronic Health Records (EHR) Meaningful Use

Healthcare Claims Payment Optimization: 7 Things to Consider

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Virtual Cards

Virtual Cards are widely accepted, precise, and fraud-resistant. However, the cost of acceptance may be a point of resistance for some providers. Virtual Card payments have been around for 15 years, but are a relatively new, growing payment method in healthcare. Providers are presented with credit card information (including card number, expiration date, and security code), which they enter through their Point of Sale (POS) system. Funds are settled through the credit card network, and data necessary for re-association is provided with the remittance.

Virtual Card Pros

Ease of Acceptance: with Virtual Cards, it is not necessary to enroll providers to accept payment; over 600,000 US healthcare providers already accept credit cards.

Ease of Implementation: Virtual Cards may be an especially good alternative when payers and providers want to move away from check but are not ready for payment modes that require implementation resources. No new processes, technology, or cost is involved.

Funds Availability: this method offers the quickest availability of funds for providers, and funds are guaranteed.

Float: because the credit card issuer extends payment terms, Virtual Cards offer cash flow advantages for payers compared to other payment modes.

Risk: to minimize fraud and misuse, payments can be locked down to only medical providers and have check-like controls to manage down to the penny. No banking information needs to be exchanged and maintained, reducing the chance of data compromise.

Remittance Detail: Virtual Card payments created through most banks and clearinghouses can include robust remittance data appended including the TRN. This detail can include the entire 835 which can be confirmed like ACH.

Virtual Card Cons

Cost of Acceptance: the provider pays a merchant discount fee to accept Virtual Cards. This can be lowered by bundling transactions or depositing credit card funds directly into the provider’s account. For infrequent or small payments, Virtual Card payments are often less expensive than other payment modes, considering the process efficiencies and low cost of implementation.

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Healthcare Claims Payment Optimization: 7 Things to Consider

Considering the pros and cons of each payment method, payers need to involve providers in a mutually agreeable decision regarding the payment method. The provider might want ACH but not have the resources to do the work to reap the benefits of ACH. On the other hand, the payer might want to use Virtual Cards, but the provider may not think the benefits are worth the cost of acceptance. What’s needed is a solution that is flexible enough to match each payer-provider scenario. Increasingly, this solution includes multiple payment modes. Each payer (or game player), and situation, is unique and requires a unique payment solution.

A HEALTHCARE PAYER DECISION SUPPORT MODEL Payer PerspectiveIt stands to reason that each payer plays the game differently. Each payer’s strategy is distinct, informed by its payment objectives and paper reduction goals, while considering existing and future provider relationships.

In our example game, let’s consider a medium-sized payer, such as a regional health plan, or larger TPA (Third-Party Administrator). Payments are made to a wide variety of healthcare providers, from single-physician practices to large hospital networks. Like most healthcare payment scenarios, a majority of the payment dollar volume goes to the large providers (the classic 80/20 rule). However, in terms of sheer quantities, most payments are smaller, going to a fragmented supplier base. A minority of payments are non-HIPAA-related, such as for workers’ compensation or other non-HIPAA-covered entities such as payments to chiropractors.

In this example, the strategy is to target high-frequency, high-share payers for ACH (which has long-run cost advantages to providers, after non-trivial start-up costs). Others will be targeted with Virtual Cards. Check is the last-resort, as the most expensive, least efficient option. This example uses an “opt-in” strategy. That is, providers are given the option to select which payment mode makes the most sense for them, potentially in consultation with the payer. Opt-in strategies confer a higher level of provider choice (with high regard for payer-provider relationships). Alternate approaches may employ “opt-out” strategies with providers; that is, designating and communicating a preferred payment mechanism, and requiring providers to actively disagree and request an alternate payment method. Our example maximizes the benefit of each payment type, while actively discouraging costly, manual, less secure check payments.

Provider PerspectiveA winning strategy in any game considers the other players and their likely responses to your moves. After all, the game isn’t played in a vacuum. The board-game analogy may be somewhat unrealistic here because, in an efficient market, we want our fellow players to succeed. After all, we can’t play the game alone. So we look for mutually beneficial (win-win) outcomes. How should we consider our providers’ perspectives? The decision criteria below strongly consider the provider’s perspective—the provider needs to see benefit to be willing and able to cooperate.

THINGS TO CONSIDER IN IMPLEMENTING A PAYMENT STRATEGY

Each payer’s considerations and priorities can be depicted as a decision tree (or a game board), which can visually represent specific decision nodes, payment criteria, decision thresholds, and optimal payment outcomes. Threshold decision values in our example are for purposes of example only and will vary according to payer objectives. Other variables, such as average payment size, may also contribute to the payment-type decision.

Healthcare Claims Payment Optimization: 7 Things to Consider

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Providers considering ACH

acceptance should consult their bank about additional

charges

Upgraded ACH acceptance to

meet ACA requirements is

timelyHIGH>15%

LOW<15%

Provider requests ACH CCD+

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Payment frquency

Payer’s % contribution to provider

revenue

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Virtual Card

Provider opts in to

ACH CCD+

Recurring payment

Provider agrees to provide

banking info

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CheckPayment

Consider Fees

Need to enroll payers

Expense

High fraud risk

With virtual card, it is not necessary to ensure

that the provider’s account is properly set up to accept payment

With virtual card, no banking

info is exchanged

average availability of funds compared to check or ACH

For infrequent or small payments,

virtual card payments are

cheaper than ACH or check

SMALL/ MEDIUMBelow top 10 contributor

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contributor

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Healthcare Claims Payment Optimization: 7 Things to Consider

1) Provider RequestLet’s ease into the game with a decision that’s really a no-brainer. If providers ask for ACH CCD+ payment, by law, payment needs to be provided in that format. In this case, go directly to ACH CCD+; do not pass go. Hopefully, the payer is ready. However, if providers don’t request ACH payment, the decision should be based on a conversation between trading partners, considering the factors that follow, including payment specifics and respective levels of readiness.

2) Recurring Payment

It may be impractical to have conversations with all trading partners, especially with many smaller, infrequently paid providers. So how do we approach these situations? First off, if the payment is not recurring, ACH setup and enrollment will not have a high return and will not be worth it for either trading partner.

3) Frequency of PaymentWe’re not just playing for fun. We need some discipline to increase our odds of winning. We need some “game-logic” to direct us. Of the total number of payments, what percentage of payments does each provider represent? If it’s a relatively low percentage, the communication and administrative setup required for ACH will not make economic sense to the payer or provider. We need a threshold. Let’s say 15 percent. If more than 15 percent of payments go to the provider, we should encourage them towards ACH. The 15 percent decision threshold is relatively arbitrary in this example. The actual decision threshold should be based on a financial analysis weighing the costs of ACH implementation and enrollment versus the ACH cost and benefit to the provider (assuming

the provider is ready to accept ACH). We should also consider the differential cost advantages of converting from checks to Virtual Cards or ACH—by evaluating implementation and operating (variable) costs for each method. Importance to and impact on the provider relationship are more difficult to factor in, since they are relatively subjective. Nevertheless, a line in the sand (threshold percentage) should be created and used to route us to the next game decision point.

4) Percentage Contribution to Provider RevenueA provider will most likely work harder to reduce costs and increase payment efficiency when a specific payer represents a large percentage of the provider’s claims revenue. Since the provider will receive more benefit, the provider will likely invest more in communicating, encouraging compliance, and testing with payers that represent a high percentage of claims dollars.

Alternately, if a payer represents a very small percentage of a provider’s revenue, the provider’s incentive to invest in cost and efficiency take-outs specifically for that payer may be lower. The payer doesn’t want to be the tail wagging the dog.

Recurring payment

For infrequent or small payments,

virtual card payments are

cheaper than ACH or check

LOW<15%

HIGH>15%

Payment frquency

Payer’s % contribution to provider

revenue

SMALL/ MEDIUMBelow top 10 contributor

LARGETop 10

contributor

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So again let’s draw a line in the sand. If the payer contributes more than 10 percent of the provider’s claims revenue, we will put them on the track to ACH (if the provider can accept ACH payment). If not, we need to consider more decision criteria. As with frequency of payment, the threshold for percentage contribution should be based on the payer’s differential cost/benefit of moving to Virtual Cards versus ACH. The payer should also model providers’ cost/benefit in transactions with payers like us (as a proxy for their incentive to invest in payment methods).

5) Average Size of PaymentSo far, we’ve set up the game-board on two major tracks, pointing towards ACH or Virtual Cards. If certain well-designed thresholds (high frequency of payments, high percentage contribution to provider claims revenue) are met, then the provider is on a track towards ACH. Otherwise, Virtual Cards are a good option. But remember this model is collaborative (win-win), using an opt-in strategy that has high regard for provider choice.

We haven’t added them to this game scenario for simplicity, but it might be worth considering other financial metrics on the game board. For example, a threshold for the average size of the payment can be set in a way similar to payment frequency and revenue contribution. With average payment size, payers should consider that with Virtual Card acceptance fees to the provider are generally proportional to the transaction size. However, this is mitigated when providers can take advantage of special lower merchant discount rates for very large payments, or when multiple payments to the same provider can be aggregated, without sacrificing 835 re-association. Also, Virtual Card payments deposited directly into provider accounts can qualify for a lower merchant discount rate, which also can be modeled. Payment size probably overlaps with the previously discussed decision thresholds in that there is a usually a strong correlation between the size of the provider, frequency of payment, revenue contribution, and average size of payment. In other words, payment size may act as a proxy for the previous decision thresholds, simplifying the game board.

6) Is your Provider Ready and willing for ACH-CCD+ payment?On the high frequency, high contribution track, if the provider is willing and able to accept ACH CCD+ payment, great! Move your game piece to the last space on the board—the payer and provider are happy.

On the lower frequency, low contribution, Virtual Card track, it makes sense to assume the provider will be more likely to accept Virtual Cards. But since this is a collaborative game, let’s ask them if they’re ready. Based on a Black Book 2012 user survey, 86 percent of provider business managers are certain their practice management and revenue cycle systems cannot accommodate upcoming regulatory requirements and updates. Nearly 100 percent stated the practice’s financial software and workflows are unprepared for ACA participation. The provider may not have the capability to benefit from the ACH-CCD+ standard; this may especially affect smaller providers who (remembering the 80/20 rule) receive the majority of the payments in terms of quantity.

Another potential barrier is that the provider may not agree to supply its banking information. The provider needs to set up their account to accept credits and debits from the payer, and the provider and payer need to store and update bank account information.

Virtual CardPayment or

Check

Virtual Card or ACH ACH

Virtual Card or ACH

Low

Low

High

High

Payment Frequency

Payer’s % revenue

contribution

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Healthcare Claims Payment Optimization: 7 Things to Consider

Additionally, the provider or payer might not have the capability to mount ACH enrollment campaigns. Remember one of the benefits of Virtual Cards is that it is not necessary to ensure that the provider’s account is properly set up to accept payment—nearly all providers already accept credit cards, without new processes, cost, or technology. It is easy to create and accept payments. No provider enrollment is required.

What if providers are not ready, or willing to accept ACH payment, and also do not opt-in to Virtual Card payments? While some strategies may employ a more aggressive approach, in this scenario, the last-resort default option is check. For very infrequent, low-volume payments to small providers, the effort to coerce them to move away from checks just may not be worthwhile. For higher-volume providers, negotiation may be practical.

7) Payments to Non-HIPAA Covered EntitiesPayment via ACH may be impractical for certain non-HIPAA covered activities, including workers’ compensation, property and casualty, and payments to non-HIPAA service providers. These organizations may not be prepared to accept payment detail in the CCD+ standard or may not want it, as it is not mandated. Small, non-covered entities would probably prefer to accept credit card payment and collect remittance detail via a means other than CCD+ re-associated with electronic 835.

CAN THE PAYER COMPLY WITH EFT & ERA OPERATING RULE IMPLEMENTATION?

Hopefully the answer is yes. If providers ask for ACH CCD+ payment, by law the payer needs to provide it. But if providers don’t request it, the decision should be based well-constructed decision thresholds, and if warranted, conversations between trading partners, considering economics and respective levels of readiness. Even providers that wish to accept and integrate the new ACH CCD+ format may not be able to do so immediately; in which case, Virtual Card acceptance offers an easy, quick solution to reduce paper and increase data and remittance availability, without the investment in advanced payment and payment acceptance capabilities. Regardless, it’s probable that checks won’t disappear immediately, and Virtual Cards and ACH will continue to support choice and provide flexibility in a collaborative market. The key is to optimize the mix based on rational, objective criteria.

ABOUT WEX HEALTH

WEX simplifies the application of electronic payments for complex transactions with a seamless interface into healthcare insurers’ existing claims processing systems. The WEX Health solution passes information between your operational software and our payment system to create single-use, virtual accounts for provider payment. We support multiple virtual payment types and offer a range of healthcare-specific features that address even the most complex payment scenarios.

Find out more at http://www.wexinc.com/wex-health.