Diversify with Care

Many providers are diversifying their payer base. The motivation is to reduce the effect of cuts in Medicare reimbursement and to have a smaller percentage of revenue at risk in competitive bidding. These are good reasons to diversify.

The payers and customers that are being sought include insurance companies, HMOs, institutions, agencies, consumers, building contractors, county and municipal governments, etc. But each new payer or customer type attaches a different set of risks to the provider business.

One of the risks to which providers are becoming more exposed is the credit risk associated with the party responsible for payment. This is not a risk with Medicare and only the slightest risk with Medicaid, so most providers have not developed a formal policy and procedure to guide the issuance of trade credit.

One provider's experience can serve as an example. The company began in rehab, then diversified to offer cash-and-carry items and other products that don't require third-party reimbursement, like vertical lifts and stair lifts. One of the distribution channels for the company's elevators was home builders and remodeling contractors.

When they could sell an elevator to one of these builders, the provider would give terms of up to 90 days. But when management was asked how they determined the builder was likely to pay, they didn't have an answer. The practice was to give a builder a $16,000 device because they believed the company was a builder.

Of course, these new customers didn't always pay as agreed.

As providers diversify their payer mix, the risk of loss to bad debt will go up. Although credit risk does not seem to be a big problem now, smart providers will not let it become one. The risk can be managed with the proper use of a credit policy and procedure.

Essential elements of the credit policy should include what types of entities may receive trade terms, how they will be qualified, who has authority to grant the credit and what happens if the credit that is extended is not paid back as agreed.

The procedures are more detailed and, at a minimum, should provide for the following:

• The credit application

  Start with a description of the types of entities that must make application or that are exempt. (Use the shorter of the two possible lists.) Describe the application form. Refer to forms that have been completed for equipment vendors or purchase forms. Your form should collect information that will facilitate the purchase of credit reports and account information with several other creditors.