Healthcare Self-Payment Collections – Reducing Cost of Card Payments

We prepared the following analysis before the Durbin amendment became effective on October 1, 2011.  We will be updating this analysis in the near future but the general guidelines presented are still very valid.

Reducing your healthcare organization’s cost of processing credit and debit card payments from patients or businesses can be a herculean task because the payments industry is unnecessarily complex and confusing. There are so many industry terms—such as qualification tiers, downgrades, interchange, assessments fee, batch fee, automated clearinghouse fee, authorization fee, settlement fee, address verification service fee, and payment card industry compliance fee—that even a sophisticated healthcare finance leader can get cross-eyed.

How well do you understand your hospital’s or health system’s true cost of credit and debit card processing? It’s all in the effective rate, or the total cost of processing card payments. Once you calculate your organization’s effective rate, you can use that knowledge to drive significant savings in the cost of processing card payments.

Three Steps to Calculate Effective Rate

You don’t necessarily need a spreadsheet to determine your organization’s effective rate. Just grab a calculator and your recent monthly merchant statements for Visa, MasterCard, Discover, and American Express. Follow these three easy steps:

  1. Add all the fees, regardless of the name, charged by your payment processor for Visa, MasterCard, Discover, and American Express credit and debit card sales; if you have a separate agreement with American Express, then you will need to reference the American Express statement for its fees
  2. Determine your total net sales for the month (total sales for Visa, MasterCard, Discover, and American Express minus returns/credits issued to your patients)
  3. Divide all fees by the total net sales; you should get a value like 0.0273 percent or 2.73%

The 2.73% represents your effective rate—or your organization pays $2.73 in card processing costs for every $100 in billable services.

What Is Your Savings Opportunity?

Determining if your effective rate is reasonable or high depends on the following:

  • Your industry
  • Whether cards are swiped, key entered, or a combination of both
  • Average ticket
  • Mix of card types

The average effective rate in the healthcare industry is 2.52%. In other words, $2.52 is being paid in credit card and debit card processing costs for every $100 in billable services. The exhibit below identifies the savings opportunity based on a healthcare organization’s overall effective rate if it processes at least $500,000 in annual credit card or debit card payments.

For instance, if annual card transactions—both credit and debit—for a hospital, health system, or physician group is $5 million, and the overall effective rate to process these transactions is 3.5%, then there is potential to save up to 1.0% (i.e., 3.5% – 2.52% = approximately 1.0%). For a health system processing $5 million in card transactions, the 1.0% translates to a savings of $50,000 per year. That’s a significant improvement to any organization’s revenue cycle.

Savings Opportunity Based on Effective Rate

< 2.00%

2.01% – 2.75%

> 2.76%

Cards are swiped




Card information is taken over the phone, over the Internet, etc.)




Source: Optimized Payments Consulting, Inc.

How to Lower Your Effective Rate

Many healthcare finance leaders will be surprised to learn that their organization’s effective rate is much higher than they expected. The next step is to lower your effective rate. Investing time to learn the nuances of the payment industry can help you uncover sizeable savings. Here are some tips you can utilize to realize meaningful savings:

  1. Increase payment options: According to a CyberSource survey, merchants that accept three or more payment alternatives see up to a 14% lift in sales conversion. Consumers indicate that, given equivalent product and price, accepting a payment type they prefer is a key influencer in their purchase decision. Consider the following payment alternatives for your organization: credit cards, pin-debit cards, ACH (direct debit from bank accounts), PayPal, etc.
  2. Eliminate Middlemen: Most payment processors (the companies that process the payment and deposit the money into your account) are actually resellers of the top U.S. payment processors. You can save money by signing up directly with these top processors. Some resellers provide valuables service like foreign language support, niche point-of-sale software support, etc. but the majority of the time they simply add additional cost to your service. The top U.S. payment processors are Chase Paymentech Solutions, First Data Merchant Services, Elavon, Vantiv,  Global Payments,  and Heartland Payment Systems.
  3. Explore Unbundled Pricing:   Most often merchants get better value and lower cost by choosing interchange pass-through pricing than bundled tiered pricing.

Small reductions in overall effective rates can yield profound savings when applied to any organization with significant card sales. In the current economic environment, any and every savings opportunity is significant.

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