Lockbox service can be beneficial

Healthcare Financial Management, Jan, 1994 by James S. Sagner

Some banks produce terrific cash management products. Some bankers, however, do not know how to sell them to healthcare financial managers because they do not understand the most important attributes of these products from a healthcare financial manager's perspective.

This occurs because banks hire mostly finance experts, not marketing experts. They can plot strategies for financing organizations and can use net present value or internal rate of return to quantify capital allocation decisions. They may be able to understand the cash management problems of Fortune 500 companies and, in fact, their training is oriented to the requirements of global business. But when it comes to a standard lockbox service they may have trouble understanding how it can be of benefit to a healthcare organization.

If a healthcare organization chooses to use a lockbox service, insurance companies and patients are directed to send their payments to a post office box, which is monitored by the lockbox bank. The bank retrieves the mail, processes checks and remittance advices, and deposits the items into an account. The bank notifies the healthcare organization of the deposit amount, and the payment detail information either is transmitted directly or sent by mail.

A lockbox service is typically sold on the basis of "float" savings. The physical receipt and subsequent collection of checks is facilitated so that access to money is gained faster than it otherwise would be through postal service delivery and internal processing of mail. One day's float, however, does not mean much to an organization doing $30 million in annual sales because the annual value of a day's float at current interest rates is fairly nominal: $30 million / 365 calendar days x 5 percent interest = $4,000.

A banking product will generally not be purchased to save such a relatively small sum, particularly when inevitably there will be costs involved in capturing these savings. Cash management products, however, often are sold by bankers on the basis of potential float savings because of the success rate of that appeal to large organizations.

When there is resistance to float savings as a rationale, bankers frequently tout price as a benefit. Price is an important benefit to an organization that has thousands of transactions. When the number of transactions that occur are small, which is more typical of a healthcare organization, price is irrelevant and may actually matter less than float savings. Consider the lockboxing of 100 checks daily. In the course of a year, 25,000 checks are deposited. Saving even as much as $0.10 per check gains only a $2,500 benefit, an amount that will mean very little to most financial managers and is not worth discussing with a banker.

Which aspects of lockbox service could help healthcare providers? Consider the growing problem of control that now affects organizations. Large organizations may spend millions of dollars for sophisticated systems to encrypt data and may require multiple approval/release mechanisms to manage potential loss situations. To remove the handling of cash and checks from employees, smaller organizations use such bank products as lockbox service.

As funds collection is improved, lockbox service also speeds the receipt of information that remittances contain. Faster access to payment information allows the credit and collection process to be initiated earlier. This is of obvious importance to hospitals and HMOs awaiting insurance payments for services that have been provided to patients.

Another important attribute of lockbox service is convenience. The bank provides the services usually performed by a healthcare organization's internal staff, such as depositing daily check cash receipts. Although the banker assumes that a premium price can be charged for faster banking transactions, many organizations will forego a few seconds of speed for operational convenience, as there may be few banking transactions executed in a typical day.

Regardless of the cash management product, when a banker wants to discuss float, technology, or price issues, healthcare financial managers should hear him or her out and then turn the conversation to control, credit, collection, and convenience. If the banker fails to understand or respond to the financial manager's specific needs, however, it becomes the financial manager's responsibility to ask the right questions.

James S. Sagner, PhD, is executive vice president, Sagner/Marks, Inc., a treasury and cash management consulting firm in Chicago, Ill. Readers' comments and questions are welcome and should be addressed to him at Sagner/Marks, Inc., 117 N. Jefferson St., Suite 201, Chicago, Ill., 60661-2306.