Accelerating demands related to new care delivery and payment arrangements, coupled with continued reimbursement constraints, pose substantial margin pressures at not-for-profit hospitals and health systems. Every line item of an organization’s income statement receives regular scrutiny for ways to improve performance.
Proactive executives responsible for managing commercial banking relationships and services should be looking closely at Treasury Operations to identify improvement opportunities. Areas of focus should include:
• Optimizing daily cash operations related to funding disbursements, managing excess cash, reporting to end users, and other functions
• Streamlining manual processes, such as cash positioning, and reconciling receipts and disbursements
• Managing bank relationships to drive the best cost/service mix and to maximize credit capacity at the right pricing and terms based on available non-credit revenue
• Partnering with accounts payable and supply chain to optimize payment terms and maximize rebates
• Helping revenue cycle staff to minimize time spent posting payments in order to focus on higher-value tasks, such as denials management with insurers
Two types of improvement opportunities in health system Treasury Operations warrant consideration—balancing credit capacity and non-credit banking activities, and documenting and enhancing efficiencies and revenues.
Balancing Credit Capacity and Non-Credit Banking Activities
Although Treasury services offered by banks could be considered somewhat of a commodity, it can be difficult to comprehensively identify and understand associated fees. How does the bank price its services and how do such prices compare among other banks? Determining whether the price paid is appropriate for services received now and into the future is challenging.
Contracts with banks typically are in place for three to five years and contain hundreds of deal points. Once these myriad details are negotiated and associated fee codes in place, the codes must be monitored for accuracy and identification of any service excesses, which should be adjusted. Additionally, the Treasury team must be alert to opportunities for price breaks as the business changes over time due to healthcare’s expanding and contracting volumes on different payment streams.
Tracking bank fees paid against contracts requires high-quality Treasury infrastructure, processes, and tools, and in-depth understanding of each contract term. A Treasury manager may be hard-pressed to “keep things working,” much less to ensure that “things are working right,” to achieve the lowest-possible cost and greatest-possible efficiency.
Hospitals and health systems, of course, look to banks for both credit and non-credit-related services. Since banks typically make a slim margin on credit services, they prefer non-credit services with recurring fees that are difficult to move from one bank to another. A contract as a hospital’s Treasury Operations bank to handle payroll, payables and receivables, prepaid cards, and other items provides the bank with a fee for every transaction. As volumes flow through hospital Treasury services, the bank is gaining revenue. This is sticky business for the bank, providing the bulk of its profit.
Once a Treasury banking arrangement is established, healthcare organizations typically dislike changing banks. Multiyear contracts are involved and it is complicated and disruptive to start over again with a new bank. But contractual benefits must be reciprocal; the price must be right for the hospital or health system because fees are significant. Hospitals often spend as much annually on Treasury banking fees as on a one-time basis for an investment banker who negotiates a debt arrangement. The fees paid for the debt-related service typically receive high scrutiny and are negotiated by financial advisors. Organizations should be similarly focused on what they are paying their banking partners for Treasury Operations services each year.
Advisors with visibility into a range of current market offerings can help Treasury executives renegotiate with their existing bank and/or make a bank change less painful by establishing infrastructure and processes. They also can ensure that the bank used for Treasury services is extending credit at the best-possible level and rate. Leveraging the Treasury services and credit conversations in tandem can yield improvements in expense reduction and credit capacity.
Documenting and Enhancing Efficiencies and Revenues
Many Treasury processes are stored as institutional knowledge. Staff changes jeopardize this critical information. For example, will a departing Treasury Manager be able to impart to his/her successor the details of specific contract terms, services agreed to by the bank, terms with vendors, and other items? Lack of documentation, spreadsheets residing on one person’s laptop, manual fixes, and other problems keep Treasury staff busy re-doing work. Documenting Treasury processes ensures continuity and the ability to track progress in improving the Treasury function.
Efficiency of Treasury Operations is ensured by proper infrastructure, processes, and tools. Treasury departments attempt to balance daily tasks with projects involving other administrative functions including human resources, revenue cycle, accounting, and supply chain. Developing a more efficient Treasury platform often falls behind other priorities. In fact, many systems do not even produce a cash forecast.
Some hospitals may be missing the opportunity to deploy cash more effectively on a day-to-day basis by sweeping it into an overnight interest-earning fund. Enhancements such as maximizing the value of short-term deposits, eliminating manual reconciliation processes with the use of Bank Administration Institute and other standard reporting formats, and leveraging buying power to obtain rebates and discounts through accounts payable are ingrained in the culture of health systems with successful Treasury functions. These processes reduce costs and contribute revenues from administrative functions that commonly are viewed as cost centers.
Best Practices to Consider
High-performing Treasury Operations in hospitals and health systems ensure the best practices that follow:
1. Treasury Operations Catalog and Analysis: Documentation of institutional knowledge of Treasury Operations and credit and non-credit banking relationships; and assessment and identification of the value of credit received in exchange for non-credit business, ideally on a bank product basis
2. Banking Services Fees Analysis: Identification of actual price variance from contract terms and opportunities to remove unnecessary services; increased automation of analytic processes; and optimization of bank pricing discounts by leveraging relationships
3. Treasury Services and Bank Credit request for information/request for proposal: Use of the Treasury Operations catalog to identify the right set of services to bid out; management of the RFI and RFP processes to include document development, vendor management, scoring and reviewing proposals; and development of a general implementation process roadmap
Data gathering, solution creation, and, ultimately, the execution and ongoing management of appropriate strategies for these three practices can be rigorously and optimally addressed by an advisory firm.
For more information on how Kaufman Hall can help, contact Eric Jordahl, Managing Director (ejordahl@kaufmanhall.com), Robert Turner, Senior Vice President (rturner@kaufmanhall.com), or Geoff Stenger, Assistant Vice President (gstenger@kaufmanhall.com) at 847.441.8780.
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