Using EDI to improve the accounts payable department

Healthcare Financial Management, Jan, 1994 by Richard Bort, David R. Schinderle

Additional paperwork, escalating costs, and an outdated accounts payable system at St. Joseph Health System forced management staff to alter the way the accounts payable department operates. This article describes the process the health system used to automate one of its accounts payable departments by using electronic data interchange/electronic funds transfer (EDI/EFT) technology.

Over the past few years, hospital material and supply vendors have progressed from billing hospitals with monthly statements to billing with invoices. Furthermore, invoice billings have progressed from one invoice per purchase order to one invoice per shipment, with multiple shipments per purchase order. This has dramatically increased the number of invoices flowing through a hospital's accounts payable department.

At St. Joseph Health System, based in Orange, Calif., a flood of invoices forced management staff to consider adding personnel to the accounts payable departments in each of the health systems' eight hospitals, despite the health system's desire not to hire more employees.

Part of the problem stemmed from the fact that the health system's accounts payable system was outdated. It was not designed for invoice matching and was unable to be modified to meet the information requirements of electronic invoicing or payments. About 30 percent of all invoices contained errors, defined as mismatches between invoices and purchase orders. It was the responsibility of the health system's overburdened purchasing staff to attempt to correct the errors.

The accounts payable system was scheduled to be replaced within two years, and it made little sense to upgrade a system that would soon be discarded. The problem, then, was how to improve the accounts payable system while preparing for the day when a new system could be implemented. The strategy the health system finally adopted called for the elimination of repetitive, paper-based transactions in favor of electronic data interchange (EDI)--the computer-to-computer exchange of data using standardized electronic data formats--whenever practical.

Automating the patient billing/accounts receivable function was the initial focus of the health system's EDI initiative, but accounts payable applications were very much part of the EDI planning strategy as well. The health system's materials management department had been doing business electronically for years, primarily through the issuance of electronic purchase orders. Unfortunately, the same trading partners that accepted electronic purchase orders generated paper invoices, and they were paid with paper checks by the health system.

Two programs were begun to expand the relationship between the health system and its key suppliers. Suppliers would send electronic invoices to the health system, and the health system would initiate electronic payments using EDI for the remittance details.

Receiving electronic invoices would not save the health system time or money initially because incoming invoices would be printed to paper and processed as if they had come through the mail. Only when the electronic invoices could be processed by an accounts payable system without human intervention would there be significant savings.

After a thorough review of payment operations, the health system decided to outsource the execution of payments to a bank. This decision was based not only on the comparable cost of making payments, but the desire to reduce the workload of the accounts payable staff. Once payment operations were outsourced, the accounts payable staff would be maintained at its existing size, improving the quality of its work while the health system moved toward a fully electronic relationship with key suppliers. In addition, health system management staff felt the decision provided appropriate security for its payment orders while reducing the overall cost of disbursement operations.

The plan

The essence of the health system's plan was that the accounts payable system's output files, containing all of the payment data for each payment, instead of being directed to a check printer, would be directed to a bank and transmitted using EDI. The bank would read the file and issue the payments accordingly (that is, the bank would issue a check when a particular vendor required one, and would issue an electronic fund transfer (EFT) when the vendor could accommodate it).

If the vendor and its bank were sufficiently sophisticated to accept an EFT together with the remittance information in EDI form, the health system's bank would produce that form of payment. Alternatively, less sophisticated vendors and their banks would receive the EFT alone, and the remittance information would be sent separately using EDI, a facsimile machine, or a printed paper remittance advice.

The first phase of the plan has been implemented at one of the health system's hospitals, Queen of the Valley Hospital in Napa, Calif., and implementation is being planned for the health system's seven other hospitals.