The Negative Art of Avoiding Loss in Healthcare

Society Health is a healthcare focused financial management company. We invest in healthcare providers of all types whose impact strengthens communities and promotes long-term growth.

• Introduction:

  • Accounts payable management is often an overlooked, yet critical aspect of healthcare business operations.

  • Avoiding losses—through disciplined cash management—is just as crucial to profitability as revenue cycle management.

  • Inspired by value investing principles, the "negative art" of managing accounts payable can enhance financial stability and enterprise value.

Main Idea: Preserving Cash Through the “Negative Art” of Accounts Payable

Benjamin Graham and David Dodd, pioneers of value investing, famously advocated that long-term investment success relies more on avoiding losses than on chasing big wins. This philosophy, though rooted in stock market strategies, carries profound implications for healthcare practices—specifically in the domain of accounts payable management.

In the high-stakes world of healthcare, where operating margins can be razor-thin and cash flow is often strained by rising costs and delayed reimbursements, the avoidance of financial missteps becomes paramount. Accounts payable, while mundane, represents one of the most effective levers a practice can pull to preserve liquidity and, in turn, stabilize its financial position. The less financial "leakage" from sloppy accounts payable processes, the more a practice retains for growth.

This "negative art" isn't about spectacular gains or innovation but about minimizing avoidable losses. By implementing stringent accounts payable practices, healthcare businesses can prevent penalties, avoid fraud, and capture early payment discounts—essentially putting them in a position to win by not losing.

The Strategic Importance of Accounts Payable

To understand why accounts payable can be a game-changer for healthcare businesses, we need to look at how each facet impacts financial health:

1. Missed Payment Deadlines and Penalties

   • Paying vendors late incurs penalties, a direct loss to a practice’s bottom line. Beyond that, repeated delays can damage a healthcare practice’s credit rating, leading to higher interest rates on loans or lines of credit. Worse still, poor payment histories can result in strained supplier relationships, potentially leading to disrupted supply chains or demands for prepayments—both of which erode cash flow.

   Example: A midsize healthcare practice in Maryland missed invoice deadlines for two consecutive quarters. As a result, it incurred $40,000 in penalties and saw a 15% drop in vendor trust, forcing the practice into prepayment agreements. This cash outlay led to reduced liquidity and the inability to reinvest in new medical technology.

2. Fraudulent Invoices

   • Fraud in accounts payable can be difficult to detect, but the consequences are severe. Without proper controls, healthcare practices could unknowingly approve fake or inflated invoices. By instituting tighter internal checks—such as requiring multi-step verification, cross-referencing invoices with contracts, and using automation tools—practices can drastically reduce the risk of paying out fraudulent claims.

   Example: A large medical group in Virginia uncovered a fraudulent scheme involving duplicate payments made to a vendor due to weak internal controls. Over a two-year period, the practice lost $150,000 before the fraud was discovered. Implementing an automated invoice-matching system prevented further losses and saved the practice from future exploitation.

3. Missed Early Payment Discounts

   • Vendors often offer early payment discounts as an incentive to settle invoices ahead of schedule. Failing to take advantage of these discounts is equivalent to passing up a high rate of return. For instance, a vendor offering a 2% discount for payment within 10 days is effectively giving a 36% annualized return—far higher than most investment opportunities a practice might find.

   Example: A healthcare clinic in DC implemented a new cash management system and began systematically capturing early payment discounts. Over the course of a year, they saved $25,000 on procurement costs—a significant boost to their profit margins.

Conclusion: Accounts Payable as a Strategic Asset

Healthcare practices face relentless pressure to manage costs while maintaining high standards of care. In this environment, accounts payable management becomes a form of financial self-defense. By focusing on avoiding unnecessary expenses—whether through eliminating penalties, preventing fraud, or maximizing early payment discounts—practices can significantly improve their financial stability. This ultimately enhances enterprise value, making the practice more attractive to investors, lenders, or potential acquirers.

Just as value investors avoid costly mistakes to succeed, healthcare practices can adopt the same mindset: protect cash by eliminating financial "leaks." The art of avoiding losses may not be glamorous, but it’s one of the most effective strategies to ensure long-term financial health and profitability.

1  Association of Certified Fraud Examiners (ACFE), “2022 Report to the Nations on Occupational Fraud.”