How to Increase your Health System’s Spend Visibility (Spend Visibility Part 3)
September 16, 2022
Six Reasons 3-Way Matching is a Must at Your Health System
December 27, 2022The procure to pay (P2P) process is a complex process comprised of various smaller processes, all leading to acquiring and purchasing goods for a health system at the most advantageous price. Purchasing and paying for items seems simple, but in large health systems and hospitals spanning various departments and locations, the process easily breaks down. It only takes one error or process gap in any part of the P2P process to have upstream and downstream consequences for all parties involved in the P2P ecosystem: Finance/Accounts Payable (AP), Supply Chain, Vendors, and the End-User.
What is the Procure to Pay Process?
The procure to pay process typically begins with a requisition for an item or service, goes through the purchasing and receiving of the good/service, and ends with payment for the good/service.
Over our 35+ years of working with Supply Chain and AP at health systems exclusively, we have come to learn that the process begins when a contract is entered into the system. While contract management is typically left out of the P2P process, any slight error, such as a missed item, overlooked discount, or a wrong letter in a unit of measure (UoM), may have financial loss further down the process.
In fact, at TAG, we look at over 50 categories that impact the P2P ecosystem and its outcomes. We break these categories into five focus areas that help to assess risk at each step of the P2P process for our healthcare clients.
Top Procure to Pay Focus Areas to Reduce Risk
1. Contracting
Why do we include contracting as our first focus area? As mentioned above, contracting involves much, from negotiating terms and conditions to entering contract data to managing expirations that affect actions downstream, costing lost funds and resource waste.
We also incorporate the contracting focus areas to reduce risk throughout the P2P ecosystem, including centralizing contracts within a health system, tracking spending for tiered pricing and rebates, gaining insight into opportunities to cut costs through pricing negotiations, and managing the item master.
Supply Chain assumes most of the responsibility in this focus area, including Sourcing, Procurement, Value Analysis, and more. However, the end user is also involved as they identify the need for the good or service and may have a say in the vendor chosen.
FYI: Our Discovery Review evaluates 25 categories under the contracting focus areas, including contract structure, contract repository, item handling, and contract management.
2. Requisition, Approval, & PO Creation
The next focus area contains the traditional start of procure to pay: requisition. Beginning with the end user, this area also contains requisition approval and the creation of purchase orders (POs).
The requisition moves into approval and is reviewed and approved or rejected The approval decision often considers the need, how it fits into the budget, and validating the requisition. Ideally, the requisition and approval process is automated in the health system’s ERP allowing for easy and quick responses.
Deterrents to automation can result from errors in the previous focus area. For example, bad contract data, disordered item master, erroneous requisitions from manual entries, or disconnected computer systems can halt automated workflow from that point on in the procure to pay process.
Deterrents to automation can result from errors in the previous focus area. For example, inaccurate contract data, disordered item master, erroneous requisitions from manual entries, or disconnected computer systems can halt automated workflow from that point on in the P2P process.
of health system spend is NOT made with a Purchase Order (PO)
While contract entry and management are essential to the entire P2P process, this focus area contains the glue that holds a successful P2P process together: POs. Without POs, a health system is 32% more likely to experience errors throughout the remaining P2P process.
On average, 69% of spend at health systems is NOT made with a PO, which creates risk for erroneous transactions such as duplicate payments.*
3. Goods Received or Services Performed
The third focus area we advise on is receiving (and often the return) of goods, as well as the management of services. This area makes up 36% of P2P errors our team uncovers at health systems on average, resulting in a loss of over $7.6M in 2021 alone.*
Receiving documents must be reviewed and logged to ensure they match the PO and contract terms.
lost on average from a health system in 2022 due to returned goods and purchased service management errors
Returned Goods
Returned goods is often a complicated process inside the larger P2P process, and there is no standard process that applies to all health systems.
Returning goods, tracking items, and ensuring credits are received requires multiple departments and the end user to ensure success. End users must initiate the return with the vendor through the health system’s purchasing department. They must ensure the items get to the correct receiving area or dock to be sent for return.
Purchasing then needs to ensure the correct vendor authorization is received and all pertinent information is logged on the original PO. Receiving is responsible for getting the physical item back to the vendor and recording relevant tracking numbers. AP should follow up with the vendor on the status of any expected credits and process them against the correct PO.
Purchased Services
Purchased service management is another complex process inside P2P since not all services performed are witnessed by the appropriate hospital staff. Therefore, servicers cannot always be tracked. Services such as landscaping, snow removal, and routine maintenance are often left to the vendor to perform and invoice. Often health systems are left paying for services that did not get performed or poor-quality services for which they would normally withhold payment.
The best way to avoid this is to create and actively manage a service log that indicates when a service is performed and indicated the work accomplished. Avoid having end-users or buyers mark a service "received” in the ERP system without first attempting to verify requested actions were completed.
4. Invoice Processing
As mentioned earlier, a PO is essential to reducing errors in the P2P process. It is in this P2P focus area that its importance comes into play. Invoice processing begins by matching the received invoice against the PO allowing the ERP system to match the PO to the received status. When each of these documents aligns, a three-way match is successful, and the invoice can then be allowed to pay.
However, when there are matching errors or missing components, such as the PO, the invoices get flagged as exceptions (as mentioned above). This then begins the exception handling and reconciliation process.
The invoice processing focus area consists of the matching process and exceptions handling process but also encompasses 14 categories that we analyze and review, including invoice approvals and technology utilization, such as EDI (electronic delivery invoice), OCR, and ERP system controls.
We include an evaluation of the technology used as we recommend automating as much of the P2P process as possible. However, it is necessary to note that technology can be prone to errors just as humans can. For example, imaging software may scan incorrect characters, causing matching errors. Another example exists when system automation flags or prevents duplicate payment of the same invoice; however, when a human is involved and may enter an incorrect character or date, the ERP system with not be able to catch the duplicate entry.
5. Payment Issued
Although issuing payment may seem self-explanatory, the payment issued focus area contains ten categories of significance that impact the P2P process.
If approval is given and the three-way match is successful in the previous area, payment can be that simple. However, the payment method becomes a factor in reducing risk and speeding up days to pay, a crucial factor in any health system’s cash flow strategy.
Health systems must diligently enter credits to be deducted immediately on the next payment run. This ensures credits are not lost, misapplied, or left open on vendor accounts. Accurately managing and using credits keeps cash in the health system as well.
Considering all the processes and various departments involved in P2P, understanding all of the pieces, responsibilities, and handoffs, as well as performing each step, is complex and requires skills across Finance and Supply Chain.
The only way to truly get a look at your unique P2P process is to document a detailed process map overlayed with spend analysis showing the flow of funds and actions through each area. We provide just that. Partner with our experts and put our 35+ years in healthcare to use at your organization. Reach out now to learn more.
* Statistics mentioned above were compiled using actual health system P2P data from TAG clients.
