How does your Health System Leak Funds?
A Resilient and Agile Supply Chain Led by Sean Poellnitz at Mosaic Life Care
April 8, 2021
Tips for Influencing without Authority to Optimize Healthcare Business Processes
June 24, 2021You hear time and time again that your health system continues to leak funds, especially within the procure to pay (P2P) process. But, what does it really mean to “leak funds,” and what causes these leaks? Keep reading to find out.
“Leaking funds” is the loss of funds within your health system that are caused by errors and/or inefficiencies within your department/health system.
Common Types of Leaked Funds
Overpayments
Overpayments occur when your health system pays more than the agreed-upon contract price for services. It is important to verify the invoiced total with the contracted agreement before processing payment. The utilization of purchase orders (POs) and proper purchased service management can help reduce this type of leaked funds.
Duplicate Payments
Duplicate payments also referred to as “dupes,” is a type of overpayment and one of the leading causes of leaked funds found inside the P2P process at health systems. Duplicate payments are made for various reasons including incorrect data entry, outdated Vendor Master, incorrect use of a Purchase Order (PO), payment of non-original invoices, and more.
Overcharges
Overcharges occur when a vendor, usually mistakenly, charges more for products or services than the agreed-upon contract pricing. Overcharges can be monitored at the invoice line level and compared to contracts before payment is processed.
NOTE: Ensure you check GPO contracts to ensure you are being charged at the correct tier to prevent overcharges as well.
Returned Goods Process
Most health systems struggle with their returned goods process, a process leaking over $700M each year across the USA. Tracking returned goods is a complex process due to all the variables in place making it the number one area that we recover funds for our clients during a recovery audit project.
Discover how to quantify and optimize your health system’s returned goods process with our on-demand webinar.
Unused Credits
One area that often goes overlooked or may not be an obvious “leak” is credits that go unused. If you overpay or return products, vendors will often offer credit in return, but not all vendors make it a priority to track your health system’s credits. Therefore, it often lies on the AP staff to monitor their own credits and ensures you are processing and deducting what is available/due.
Missed Rebates
Much as you track credits on your vendor accounts, you must also track rebates – often negotiated for bulk purchasing during the procurement and contracting process. Vendors do not always remember or may not automatically process rebates when owed. Therefore, this also becomes the responsibility of your health system to track and capture rebates owed.
Missed Discounts
Vendors may forget to process discounts before invoicing your health system that you earned through bulk purchasing, GPS tiers, or prompt payments. This is another leading area of leaked funds that need to be monitored and reviewed by departments inside your P2P process. Further, optimize your vendor ERP payment terms to ensure invoices are paid within prompt payment discount deadlines.
Unclaimed Property
Unclaimed property often goes unnoticed, but can quickly add up and, with laws in place, becomes the property of the state, making it even more difficult to track and recover. A regular review process can ensure the task does not become overwhelming.
Contract Lapses
You must monitor the expiration of your health system’s contracts and renew contracts before they become inactive. Often time, the contracts are in place because your organization purchases the products regularly, and may continue doing so after the contract expires. Purchases made out of the contract period may be charged at full price rather than the discounted price procurement originally negotiated.
Renewals and negotiations can also take time to get the appropriate signatures and pricing loaded so expiring contracts should be addressed early enough to allow all necessary actions for the favorable pricing to continue uninterrupted.
Paying for Unnecessary Services
Funds are often leaked at large, complex health systems where services are continued to be paid for while no service is rendered or needed. This often occurs in telecom, where your organization may be paying for more storage or mobile services and devices that are being used.
Common Root Causes of Leaked Funds at Health Systems
Lack of Staffing
Health systems like yours usually run lean on staffing, especially in business functions. The COVID-19 pandemic proved to challenge this even more with record layoffs and furloughs with departments having to cut staff by up to 67%* without any reduction in workload/responsibility/functions. As expected, these departments lacked the bandwidth to do everything necessary within compliance and quality control to ensure each step throughout the P2P process was effectively completed. While many organizations struggled to do this during regular business operations, the burden of the pandemic forced these departments to pick and choose which tasks to complete, which left many steps and processes at risk for growing leaked funds.
Whether running lean or amid a crisis such as the pandemic, having enough resources is essential to monitor and track all things necessary to prevent leaks like those listed above. The right technology and controls can take much of the pain out of the process, but automated processes must still be monitored and reviewed regularly to prevent leaks.
Bringing in a third party to act as an extension of your team can often be the solution to this when hiring additional staffing is not an option. Also, consider doing regular recovery audits to catch anything that has leaked through your cracks before the funds are lost forever.
* Confidentially reported to TAG Inc. from healthcare clients in 2020 amid the COVID-19 pandemic.
Process Inefficiencies
One leading cause of leaked funds is process inefficiencies due to gaps, redundancies, lack of process controls, outdated processes, staff not adhering to current process controls, and lack of continuous improvement initiatives and monitoring.
The first step to discovering where leakage in your processes occurs is identifying the process as it is done – not the process as it should be. This is often done by process mapping and then comparing this to the ideal process and leakage data to determine the most urgent steps and gaps to address first.
Process controls are vital to ensure errors do not occur within your department. Your department should meet periodically to ensure that all areas of your process have the appropriate controls based on the appropriate data. You will want to ensure that all staff in your department know who is responsible for what tasks and reporting and the controls that are present to protect them from making errors. This will allow you to work as a team to ensure the best “safety net” within your process while giving your team confidence that they are protected.
Having controls in place is a great step to stopping leaked funds, but staff can get creative and discover ways around them to make their production faster. This leads to mistakes and errors that can cost your health system millions of dollars. That’s where human monitoring comes into play, but can be tough to do with limited staff.
As you begin to put more controls in place and update processes, it is essential that you properly train your staff on the correct process and make reference materials easily accessible to them.
An example of this is a health system that worked to put a new returned goods log process in place to help reduce loss within this area. It was created by part of the department but was not fully explained to all necessary personnel and other departments for use. This caused some to use the log, while others went about doing business as usual without the log. We were an active consultant with this organization at this time and brought this to their attention. There were millions of dollars that the health system had lost over the last several years that were now lost forever.
You must also establish a culture around processes that promote continuous improvement within your department. Mistakes will happen, but someone needs to be responsible to monitor for errors to ensure that continuous improvement occurs. If the culture is not adopted, more training for team development can help transform your team’s production and adherence.
Technology Adoption
New technology can help reduce errors and loss of funds but is not a foolproof solution to ending leaked funds. In fact, the adoption of new technology such as a new or updated ERP system brings on a flux of new leaks while staff becomes acclimated and data gets transferred and manipulated. On average, health systems experience an increase of 300% in erroneous transactions while transitioning to a new ERP system.**
As mentioned before, technology and automation are great additions to any process by adding effective and efficient tools for monitoring and auditing transactions, but are not simply a solution to “turn on and walk away.” All processes and outcomes from your adopted technology should still be regularly monitored by staff or third parties.
**Average percent of recoveries from TAG Inc clients after a new ERP implementation or transition.
Interdepartmental Communication
Communication can make or break processes leading to leaked funds. Unfortunately, many health systems lack this communication throughout the P2P process where AP and Supply Chain often work in silos. Having the two essential departments that complete one process working towards different goals only creates more room for errors and a cause for pointing fingers at the other team.
For example, the responsibility of exception handling is not often clear between departments as to who does what and what needs to be communicated. Therefore, creating one process with clear communication between AP and Supply Chain would reduce leaks that occur around exceptions.
While there are many other types of leaked funds and root causes, one thing is clear: processes, collaboration, and communication are the keys to successfully reducing the amount your health system loses. If you are ready to start taking action to save your organization money but don’t know where to start, send us a message and we can help craft a custom plan that fits the unique needs of your situation.
