EDI invoices save money - electronic data interchange

Healthcare Financial Management, Sept, 1997 by James J. Moynihan

One of the first EDI standards, created in the early 1980s, was the Invoice (810) standard. This electronic replacement for paper invoicing is widely used in some industries and is becoming much more commonplace among healthcare providers.

A key benefit of using EDI for electronic invoice receipt is that it eliminates massive amounts of work. One 10-hospital health system in southern California reports that it has eliminated the data entry of 1.5 million invoice lines a year by arranging to receive EDI invoices from its top 12 suppliers.

Other providers apparently agree that receiving EDI invoices is beneficial because the practice is growing. Dan Browning, EDI manager for Allegiance Healthcare Corporation, McGaw Park, Illinois, reports that Allegiance now sends EDI invoices to 511 customers, compared with the 158 customers it invoiced a year ago; Allegiance's outgoing invoice volume has increased from 104,000 to 203,000 monthly.

Browning believes that overall growth in EDI invoicing in the healthcare industry is due to both increased support for EDI in the provider community and incentives made available through group purchasing agreements. For example, hospitals that use VHA group purchasing contracts can reduce their cost of goods purchased under those contracts by 0.25 percent if they receive the related invoices electronically. Additional financial incentives are available for electronic payment of those invoices.

The key to successful adoption of the 810 standard is to eliminate errors before automating the transactions. Before implementing EDI for invoicing, therefore, providers should receive the Price/Sales Catalog Update (832) transaction from suppliers to help eliminate mismatches between invoices and purchase orders. Recipients of the 832 update crosscheck the seller's prices against those in the provider's materials management system for discrepancies. After any discrepancies have been resolved, the purchase orders generate invoices for identical prices from the supplier's billing system.

Providers that receive EDI remittance advice from Medicare electronically have a model for dealing with EDI invoices. First, the data should be automatically uploaded into the application program. Second, the data should be processed without human intervention. Some providers have accounts payable (AP) systems that can accept EDI invoices and automatically match purchase orders, receiving documents, and related invoices. Systems that cannot manage receipt and processing of an EDI invoice in this fashion are candidates for replacement.

Cost-benefit justification of automated invoice processing is relatively straightforward for larger health systems. A relatively small investment to support EDI transactions with one or two key distributors can eliminate enormous amounts of paper. Health systems will reap greater benefits if they obtain EDI invoices not from just one or two suppliers, but from dozens. Their investment then can be amortized over many transactions.

Smaller health systems and standalone facilities face a different challenge. Many of these providers have reduced their AP staffs, and because of their reduced numbers, the AP staff may not have enough time to enter invoice line items into the AP system. As a result, invoices sometimes are not paid accurately. Without EDI, the AP staff and buyers may spend too much time reconciling mismatches between purchase orders and invoices. With more time, the AP staff may perform more accurate payment processing.

The recent rapid growth in provider use of EDI invoices indicates that electronic invoices can become a standard operating procedure in health care. The software is inexpensive, the price of hardware has plummeted, and a critical mass of trading partners is available to support EDI.

Making EDI invoices standard operating procedure will require changing the mindset of healthcare financial managers to accept paperless invoices. Today, providers need to justify the cost of converting their paper-based invoicing system to an electronic one, but in the future, they may have to justify using paper instead of EDI invoices.(a)

a. Pallarito, Karen, "The Lost Profit World," Modern Healthcare, June 16, 1997, p. 36.

James J. Moynihan, MBA, is a principal, McLure-Moynihan, Inc., Agoura Hills, California, and a member of HFMA's Southern California Chapter. He can be reached at (818) 706-3882 or via the Internet at JJMOYNEDI@AOL.COM.