Over the last few months, we’ve looked at cash flow issues found at a number of our client health systems. It’s time to take a serious look at the common thread among them: human error. Although it’s difficult at best to quantify exactly how often human error occurs within a health system, our experience tells us not only that human error is real, but many times it’s been systematized; institutionalized within an organization’s processes; incorporated within its culture to the point it becomes invisible. Here are some of the most common ways we see human error impacts cash flow at hospitals and health systems.

1. Erroneous Payments

Hospitals often put far more unverified trust in their ERP systems than they should. Although these tools are tremendous assets for any organization, the fact remains, these systems are still subject to human oversight. A simple keying error is one the easiest ways an accounts payable clerk could disrupt your organization’s balance sheet and cash flow. For example:

• AP clerk keys in a $50,000 invoice to Company A, which was actually intended for Company B
• Your ERP software approves the payment (for many reasons)
• Company A receives, accepts, and keeps the erroneous payment that was intended for Company B
• Company B inquires about its payment, research is done and shows payment was not issued to Company B
• Another $50,000 payment is made.

2. Duplicate Payments

Improper data entry also causes duplicate vendor payments, which is why we encourage every health system to conduct annual maintenance of their vendor data. For example, one of our clients had two vendor numbers in the system for Johnson & Johnson: “Johnson and Johnson Healthcare Systems” and “Johnson and Johnson Health Care System 1.” Their multi-million dollar ERP recognized these entries as two distinct companies.  An initial payment was made by a clerk to the “first” vendor; a second, duplicate payment was made by another clerk to the “second” vendor.  That simple keying error led to a duplicate payment of $45,524 on your financial reporting.

3. Tax Errors

No health system is free from tax errors — sales, use, property, etc — especially ones spread across multiple states and tax codes. Although accounting software has made the process much easier, understanding how much and/or under what conditions to pay a tax is a complex undertaking. If the responsible party isn’t up to date on prevailing tax regulations, and your ERP system doesn’t contain the correct information, your clerks may choose to simply pay what is contained on a vendor’s invoice; a charge that is incorrect and costly to cash flow. We recently recovered hundreds of thousands of dollars in property taxes paid by a not-for-profit client against a building that was incorrectly recorded as being part of a for-profit entity.

4. Pricing Errors

It’s easy to take an item’s price for granted. Generally, once it’s in the system, an item should cost a set amount every time. However, as we’ve seen in our Pricing Reviews, an item’s price may be incorrectly recorded within the client’s item master for years before the error is caught, potentially costing you thousands. Human errors in pricing include:

• A vendor keys in the wrong price and it’s not disputed by the hospital
• Your purchasing department keys in the wrong price and it agrees with the vendor’s incorrect price
• Your vendor doesn’t upload new contract pricing
• Vendor replaces a contract item for a “new and improved” item that is not on contract and invoices at list price
• Your purchasing department doesn’t upload new contract pricing
• Your health system purchases another hospital(s) and your corporate (lower) prices don’t get properly recorded for this new addition.

It’s all too easy to dismiss human error as a one-off occurrence with no real consequences, but institutionalized human error is very real and it creates cash flow statement issues that may never be identified.

Contact The Audit Group today and let our experienced healthcare auditors show you how to better identify, understand and mitigate human error.