The Impact of Transaction Fees on Healthcare Procurement and Costs
As we navigate the complex world of electronic ordering and payment processing in healthcare, it’s essential to understand how transaction fees are affecting our industry. In this white paper, we’ll explore the history of transaction fees, their impact on the industry, and what you can do to better understand and combat these fees.
A Brief History of Transaction Fees
Virtually everyone understands that restaurants and retail establishments pay a transaction fee when they accept a credit or debit card as payment. Credit card payment processing involves multiple networks and steps. In order to provide the technology required to make this system work, companies have established significant infrastructure, and they need a revenue model to support it.
In the early 2000s, transaction fees were first introduced in senior living facilities. The initial revenue model allowed providers to use software solutions at no cost, while vendors were charged a new transaction fee to accept electronic orders from them. This argument claimed that suppliers benefited by receiving those orders electronically, reducing the need for manual calling, faxing, or other methods.
The Rise of Electronic Ordering
As use of the Internet expanded and healthcare suppliers began to add online ordering capabilities, the healthcare industry shifted toward this new technology. Companies like GHX emerged to provide electronic connectivity between hospitals, large manufacturers, and distributors that serviced them. While GHX was successful in addressing the largest providers and suppliers, the non-hospital segment of healthcare was largely ignored.
The Current State of Electronic Ordering
Distributors serving the non-hospital segment began to offer both online ordering capabilities and EDI solutions. Today, larger companies such as McKesson and Henry Schein report that they receive over 60% of their total orders online. The volume of electronic or EDI orders has also risen steadily. These companies provide electronic ordering options at no cost to their customers.
Are Transaction Fees Justified?
So, are the transaction fees currently charged to software vendors in healthcare justified, or are they just added costs? We spoke with multiple distributors serving healthcare providers, and, in general, they view the fees as added costs. In essence, these fees constitute an unnecessary financial burden that penalizes distributors for the very efficiencies digital systems are meant to deliver.
A Shift in Revenue Models
In the past, suppliers would “bury” transaction fee expenses by inflating the cost of their products. As competition and margin pressure have increased in healthcare, many vendors have shifted to openly charging these transaction fees back to their customer, the healthcare provider. This is the same model used by many small businesses that charge a fee for debit or credit card transactions. As a consumer, you have the choice to either pay cash and avoid the card processing fee or accept the
fee for the convenience of using your card.
In reality, transaction fees, while seemingly minor on a per-order basis, accumulate rapidly. Whether hidden in product costs or charged outright, they contribute to higher costs for providers. Providers must then live with ever-tighter budgets or pass along these costs to their patients, increasing overall costs throughout the healthcare industry.
Our Approach
At MedProcure, we charge a straightforward subscription fee for the use of our eProcurement platform. For example, our subscription fee for a single nursing home is $250 per month, or $3,000 per year. Our customers can cost-justify this fee by the efficiencies and savings gained through the use of our solutions.
Our subscription-based model provides full transparency and aligns incentives between suppliers and healthcare providers. Suppliers know they won’t lose a portion of their margins to compounding fees. Providers benefit from more predictable pricing and greater trust in the procurement process.
Comparing Fees
We recently conducted a competitive analysis against a competitor that charges both a subscription fee and a transaction fee. According to our research, transaction fees on a nursing home with 100 beds would run as much as $8,000 per year, added on top of the base subscription fee of approximately $3,000 per year. These costs have to be paid by someone, and no matter who pays them, they increase the overall cost of healthcare.
What Can You Do?
To better understand and combat transaction fees charged by some vendors:
- If you’re exploring a software solution, ask the software company if they charge a transaction fee.
- Talk to your suppliers to ask how they deal with transaction fees charged by software vendors. For example, do they deduct them from your salesperson’s compensation, apply them to the invoice like a freight charge, etc.?
- Investigate software solutions that charge only a subscription fee. Even if you’re under contract with a vendor that charges transaction fees, you might be able to switch now and still save enough money to warrant the change.
By understanding the impact of transaction fees on our industry and taking steps to better manage them, we can work toward creating a more efficient and cost-effective healthcare procurement system.