Floating on a sea of money? - health maintenance organizations' bill payment delays

Healthcare Financial Management, June, 1997 by Jeanne Schulte Scott

"[A] big HMO...could pocket more than $400,000 a day by collecting interest on the float."

- Princeton University healthcare economist Uwe Reinhardt, commenting on reports that many major managed care HMOs have slowed down their payment cycles.

According to a new InterStudy report, HMOs - champions of efficiency - are taking longer and longer to pay their bills.(a) Three of the largest HMOs in the country - Oxford Health Plans, Inc.; United HealthCare Corporation, and Humana, Inc. - were 94, 77, and 71 days behind in their payments, respectively, at the end of last year. These three companies reported $3.23 billion in accounts payable to providers at the end of 1996.

Of all HMOs, the slowest quarter's payment cycles averaged 89.5 days. Even the swiftest-paying HMOs took more than 40 days to get the cash out the door.

When HMOs have the largest market share of all payers in a market, their payment speed goes down. In areas where HMOs had more than 50 percent of the market, providers were paid on average, in 62 days. Where HMOs had less than a 40 percent market share, payments were made in around 50 days.

Critics of HMO payment delays point to the fact that HMOs have large cash-on-hand reserves. For example, Oxford Health Plans, one of the largest plans in New York State, sat on more than $800 million in cash and short-term investments at a time when some of its contracted providers were scrambling to borrow money to meet their expenses. The situation got so bad and the complaints so vocal that Oxford decided recently to make $75 million in interest-free loans to its most irate providers.(b)

HMOs argue that the high dollar amounts they have on hand give a misleading impression of their ability to pay claims on a more timely basis. These reserves, they argue, are necessary for the traditional indemnity insurance products they offer. HMOs also contend that the industry's growing pains, including problems arising from mergers, are responsible for payment delays. Some analysts note, however, that lengthy payment cycles appeared about the time many managed care companies converted to for-profit status and had investors to please.

According to financial reports published by United Healthcare, the nation's largest for-profit managed care company, United's return on investment and income unrelated to patient care services accounted for 32 percent of the company's pretax profits in 1996. In 1994, this figure was only 25 percent. While these revenues may not have resulted from manipulation of the company's float, some in the healthcare financial community remain skeptical.

Widespread and lengthy payment delays are having a domino effect. Hospitals and physicians, whose accounts receivable are ballooning, are delaying their own payments to suppliers and service vendors, often losing prompt payment discounts as a result. In addition, suppliers forced to finance their own longer-term receivables are passing loan costs on to providers.

What to do? What to do?

To address the delayed payment quandary, providers must complain, manage, and innovate.

Complain. Payment delays have raised a hue and cry for legislative relief from some provider groups. Georgia, Texas, and several other states already have laws requiring insurers to pay providers within a set period of time. However, without some enforcement teeth, these laws have little real impact in most situations. In Georgia, where state law requires insurers to pay clean claims within 15 days of receipt, hospitals still wait about 61.5 days to receive HMO payments.(c)

A statutory remedy enacted in Maryland in 1991 appears to work better. The Maryland statute allows an interest charge of 1.5 percent a month to be added to unpaid claim amounts. According to InterStudy, Maryland hospitals are paid 16 days faster than the national payment median.

But along with legislative relief may also come some unwanted or uncomfortable new controls. Therefore, when going the legislative or regulatory route, providers should be careful what they ask for.

Manage managed care. Some providers claim they really don't know the length of their payment cycles or their HMO contract payment terms. Most managed care contracts, however, spell out the payment terms and conditions and establish penalties for delayed payments. The truth, therefore, may be that payment cycles and terms are not being monitored, a process that should be carried out by providers' financial managers, not by managed care department managers.

Anecdotal evidence exists to suggest that many providers are failing to assess delayed payment penalties against HMO payers and are even continuing to give contractual discounts for prompt payment despite ever-growing accounts receivable. Providers can get help from software packages and outside vendors that have the tools and the expertise to assess such penalties. Given the increasing impact of managed care and the dollars involved, providers should explore these options.

Innovate. Longer payment cycles and accounts receivable backlogs are fast becoming facts of life in health care. As a result, working capital accounts receivable financing - once considered the last resort of sick and dying providers - is becoming a standard operating strategy in healthcare organizations. Long accepted and creatively managed in other business arenas, accounts receivable financing is a strategy that needs to be in every healthcare financial managers' toolbox.