Charge it!

MGMA Connexion, Aug 2005 by Shavitz, Jeffrey I

The profitability and pitfalls of credit card processing

By accepting credit cards from patients, medical practices can lower receivables, reduce bad debt and improve cash flow. Patients get relief from cash flow pressure. Credit cards seem a boon on both sides of the front desk. However, adopt their use prudently.

Evaluate programs carefully

How do you know if you're getting the best deal from a credit card company? It's a complicated industry with particular pitfalls. The word "program" is critical, as many solutions exist. You want to know a credit card vendor's interest rate - yet the base rate is only part of the equation. Hidden costs can inflate credit card fees and deflate profits.

Visa and MasterCard maintain different rate structures for different types of cards, based on how transactions are processed. Manually entered transactions have a higher fee structure. Will you use a swipe machine to enter the majority of your transactions with card and cardholder present, or enter them manually - with card and cardholder not present? How should your vendor set up your practice?

To give you a sense of the difference in pricing: A business set up to swipe cards, getting charged a rate of 1.73 percent, could pay up to 3.50 percent if it manually enters the same transactions and does not provide the information required by Visa and MaslerCard. Conversely, a practice set up to enter its transactions manually could get a rate as low as 2.25 percent. Manually entered transactions that include address verification, billing addresses and ZIP codes will ensure appropriate pricing and avoid surcharges.

Transaction fees, introductory rates

In addition to discount rates, there are transaction fees. Lack of a transaction fee does not necessarily ensure the best rate structure. Companies will bundle their rates, combining the discount rate and the transaction fee to give businesses the appearance of a better rate structure. However, this strategy raises the discount rate, which could affect your profits. Bundling a rate makes sense for businesses with a low average ticket - $50 or less - and hundreds of monthly transactions, such as restaurants. Skipping transaction fees may not make sense for a medical practice.

Many credit card companies will offer a low introductory rate to entice you to sign up. But beware the "downgrades" or penalties that your practice will pay. Beyond a low base rate, inspect:

* Transaction fees for third-party cards (such as American Express and Discover);

* The percentage of manually entered transactions;

* Monthly fees; and

* Batch fees.

It's important to know the percentage of your "swiped" business and key-entered business. Vendors have different rate structures; a medical practice can pay a rate penalty if its account is not set up correctly. Know your "effective rate" - which takes into consideration all charges - vs. your base rate.

Funding and collection of fees

Two issues that businesses rarely raise are funding and collection of fees. Do you know how long it takes from the time you settle your batch until your money is deposited into your bank account? Is it 24, 48 or 72 hours? Guaranteed 24-hour funding is available. When is your discount fee taken daily or monthly? Would it be easier to reconcile your bank statement if the funds deposited were gross?

Think about the savings on interest, the float of your money plus increased cash flow if the vendor removed your fees at the end of the month. It adds up - and can greatly help your cash management.

Accepting credit cards can be a winning proposition for your practice. You increase the odds if you have all the information to ask the right questions. Do your best to align yourself with a vendor that wants to build a partnership.

about the author

Jeffrey I. Shavitz, MGMA member and executive vice president, Charge Card Systems Inc., Englewood, N.J.