Saving on merchant services: 5 questions for hospitals to ask themselves

Over the past several years, as expenses increased and margins tightened, hospitals across the nation have explored numerous ways to reduce their costs.

There are cost reduction opportunities associated with almost every element of a hospital's operation, and most have been identified and discussed in publications and presentations. But one area that has been largely overlooked is payment processing costs.

Every business that accepts payments by credit card has a merchant services provider. The merchant services provider secures the card data, and routes the information between financial institutions to ensure funds are tracked and transferred. If a hospital accepts payments via credit card, debit card or other electronic means, such as online payments made via a web portal, every transaction incurs a complex set of fees. Many of these payment processing fees are set by the merchant services provider, and these fees are negotiable.

While the cost of each individual transaction may be small, these fees can add up quickly when you consider how many payments a hospital may process each day, week, month and throughout the year. These fees are a necessary (but evil) part of doing business. The costs associated with merchant services can be significant as the fees are incurred against the revenue collected by credit card.

Here are five questions hospitals should ask themselves when considering whether there is an opportunity to reduce merchant services costs.

1. Are we paying too much to accept credit cards? According to Peter Kipp, PhD, president of Merchant Services Fee Advisors, a merchant services consulting firm, there are many different fees and fee categories associated with credit card payments, and unnecessary complexity is rampant.

"Fee structures include both a percentage of the transaction as well as a per item fee," he told the author of this column. "This structure makes the overall cost sensitive to the dollar amount of the transaction, where smaller payments are more expensive. Some of the fees are fixed (interchange), and some fees are variable (service charges and merchant services fees). The variable costs can be negotiated."

Benchmarking these costs can be challenging due to the complexity of fixed and variable fees, and the lack of transparency into what others pay for the service.

2. Are our merchant services contracts current? Fees and pricing models change frequently, and outdated pricing models lead to higher costs. If your contract term isn't current, your provider may change your fee structure without your consent. The 2010 "Durbin Amendment," a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, permanently reduced the cost of accepting debit cards. If a hospital hasn't renewed its merchant services contracts since then, the hospital may not be taking advantage of these legal reforms.

3. Is the process we use costing us extra fees? Some common organizational mistakes often lead to extra fees. For example, if a card is swiped more than once to initiate the payment, an additional fee may be incurred. If card numbers are entered manually, rather than swiping the card, additional fees may be applied. For online payments, additional information — including address and zip code — must be collected to receive the lowest rate. If your website or portal is not designed to collect all of the necessary information, your costs may be increased needlessly.

4. Should we accept American Express? Many organizations have the impression that American Express is more expensive than other card types. This is not necessarily true, Dr. Kipp says. Depending on the size of the organization and the medical service provided, the American Express cost is competitive compared to Visa and MasterCard rewards cards.
Further, many merchant services providers now have some discretion in setting American Express rates, Dr. Kipp says. This means that American Express fees can be negotiated, even for smaller medical businesses.

5. Are all the accounts priced identically? Many hospitals have grown through acquisition, and have a patchwork of different merchant services providers with different rates. With the right approach, rates can be normalized.

Further, many hospitals run discrete sub-businesses, such as food service, gift shops, pharmacy and parking structures, that add complexity to the merchant services decision-making. For example, a $0.25 fee is trivial for a $250 medical procedure, but $0.25 is grossly excessive for a $3 parking pass or coffee. All of the business operations must be considered to find the most efficient cost structure and negotiate the best rates for the whole organization.

Few medical organizations have merchant services expertise on the payroll. Making an informed decision on merchant services can immediately improve operating performance by reducing unnecessary costs. These savings accrue to the bottom line.

Jessica Nantz ( is president and founder of Outpatient Healthcare Strategies, a consulting management services firm focusing on operational improvement and efficiencies for hospital outpatient departments, hospital perioperative services and ambulatory surgery centers.

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