By John DiConsiglio

At Intermountain Healthcare, a 23-hospital system primarily in Utah, all purchases have been broken into two categories: buffaloes and squirrels. No, it has nothing to do with wildlife. Before 2005, Intermountain's purchasing was decentralized and lacked a general strategy, says Director of Finance and Information Tim Goates. The organization was heavily reliant on group purchasing organizations (GPOs). But a new chief purchasing officer brought a new vision—buffaloes and squirrels.

The buffaloes are the big purchase items—usually large-spend clinical equipment like MRIs and CT scanners. Under Intermountain's new strategy, a revitalized sourcing team would handle those buys.

But there were still all those squirrels scurrying through the hospital halls. The squirrels are the small-dollar but extremely voluminous purchases—what Goates calls "the little things that people need for their day-to-day operations." They can range from bed sheets to gallons of gas. And while they cost pennies compared with the buffaloes, they add up quickly. With $1.3 billion in supplies, Intermountain was overrun with squirrels. Employees paid for small items with petty cash, corporate credit cards or out of their own pockets. In each case, they generated purchase orders—and all the extra costs that come with them such as paper handling, invoicing and writing checks. Plus, you crossed your fingers and hoped employees remembered their receipts.

"Let's say someone needed a new [computer] mouse," Goates says. "They'd go out and buy it. Maybe they'd use petty cash. And that would lead to an invoice and a purchase order and a nonstock purchasing request. When it was all said and done, we'd take a $15 item and add 60 bucks [in processing costs] to it."

The solution was under Intermountain's nose or, more accurately, in its wallet: p-cards—or procurement cards, the bank-issued plastic that looks and acts like a credit card. Employees use them just like a corporate credit card to make authorized vendor purchases. But proponents say p-cards offer many other benefits—from speeding up payments and increasing spending transparency to reducing costs and virtually eliminating petty cash. They're a more efficient payment option than issuing checks in advance, establishing arrangements with local suppliers or reimbursing employees for paying out of pocket, Goates says. Better still, most p-card programs offer cash-back rebates.

"P-cards give you the efficiency of electronic processing without the downside of extra purchase order costs," says Goates, whose system grew from no p-cards to 2,600 in less than four years. "They've changed our purchasing playing field."

Like credit cards, p-cards give employees the freedom to buy what they need to get their jobs done. But p-cards offer more controls. Administrators can set spending limits and block vendors. Purchases can be monitored for mistakes or fraud.

"This is the right time for organizations to shift from cumbersome, paper-based processes to efficient, electronic processes, including the use of p-cards," says Lynn Larson, manager of industry information and research at the National Association of Purchasing Card Professionals. "Purchasing organizations are willing to adopt or expand a p-card program to improve the bottom line."

But even the staunchest p-card advocate has seen the potential for problems, ranging from hard-to-detect abuse schemes to tax and inventory issues. Some worry that giving employees greater spending freedom will drive up costs. And others stress that, while handing out cards is easy, the real challenges are education, training and monitoring.

"The neat part is using the card," says Michael Rosenblatt, corporate vice president for supply chain management with SSM Health Care in St. Louis. "But there's a lot of work that goes into it: the training, the month-end processing, the reconciling charges. That stuff is not so neat."

Still, Rosenblatt says plastic power has changed the way he does business. One of the largest Catholic health systems with 24,000 employees and more than $2.5 billion in net patient revenue, SSM has seen p-cards lead to cost avoidance and purchasing innovations. "If you understand [p-cards] and put the proper controls in place, then they are money well spent," Rosenblatt says.

Card sharks

P-cards aren't new. Many health care facilities have used them for over a decade. SSM initiated their card program in 1999 to complement the system's SAP software program. "SAPs tend to be gigantic programs with everything under one roof—accounts payable, purchasing, financial systems, everything," Rosenblatt says. "That's great, but it's not very flexible for one-time purchases." Today, more than 1,000 p-cards account for about $11 million in SSM annual purchases.

Systems like Intermountain and SSM establish which items fall under the squirrel umbrella. First, these items can't be inventoried. There's little benefit to using a p-card for a product that's already in the processing pipeline. Second, the squirrels can't be capital items. P-cards have spending limits, often $1,000 to $2,000. Some employees may have higher tabs than others.

Administrative assistants, for example, typically have access to more p-card funds than their bosses. "They're the ones booking the travel, the hotels, the meeting planning charges," Rosenblatt says. Intermountain has also prohibited items that might be considered taxable income or earned wages, like gift cards, Goates notes. "You have to be wary of IRS implications," he says.

But not all facilities reserve their p-cards for smaller purchases. PeaceHealth System, a 12,000-employee organization in Alaska, Washington and Oregon, originally implemented p-cards to cut invoices for small transactions and travel costs. But PeaceHealth's focus shifted as its card-issuer offered large rebates for each purchase. PeaceHealth began to use the cards for high-ticket items—from medical supplies and drugs to utility bills.

"If the vendor will take [the card], then we will use it," says Phyllis Kaylor, PeaceHealth's supervisor of accounting services. "To really take advantage of that rebate, we look at p-card purchases as 'the bigger, the better.'"

Jungle gyms and jewelry

P-cards can be individualized by credit limits, employees and vendors. P-cards are built with controls that allow designated employees to buy certain items from specified vendors. A facilities engineer, for example, may have a card that only works at job-related shops like Home Depot or electrical retailers for purchases of no more than $2,000.

Virtually every p-card system includes merchant category codes (MCCs), a list of establishments that permit card usage. Card-issuers can shut off MCCs, prohibiting cards from working at places like casinos, bars and jewelry stores. "There are controls and oversights that a regular corporate card won't give you," Rosenblatt says. "No one can take our card and go out to the Casino Queen to put money down on the roulette wheel."

But even the most careful planning can't account for every situation. Nearly every p-card administrator has stories about unforeseen buys and bizarre MCCs. Blocking jewelry stores seemed like a good idea—until a PeaceHealth physical therapist tried to buy beads for recuperating patients to string necklaces. "Her only bead store was categorized as a jewelry shop," Kaylor recalls. Spa blocks seemed sensible—until an SSM Health Care administrative assistant wanted to pick up a Bath & Body Works certificate for a United Way door prize.

In many cases, p-card administrators can contact their bank representatives and change MCC settings on the fly. Rosenblatt recalls a phone call from three maintenance men in Oklahoma City whose card was denied at a recreational equipment dealer. "We have a hospital with a day care center and they were buying a jungle gym," he notes. "They did everything right. They didn't want to issue a PO for a $100 sale. But we never thought about the card for places that sell kids' slides. They pulled up their pickup truck and got their card turned down. I wanted to hug those guys."

Keeping track

But p-card flexibility must be balanced by strong education and monitoring, users say. And there are always consequences for breaking the rules, from friendly notes to firings.

Most health care systems rely on department supervisors to determine who gets a card and what their spending limit should be. Intermountain usually designates one person in each department as the primary cardholder. PeaceHealth issues about 1,600 cards and lets supervisors decide who gets them and how much they can spend. "A manager might say we need X number of cards with a per-transaction limit of, say, $5,000 and a monthly limit of $20,000," Kaylor says. "Unless it's outrageous, we go with what the supervisors tell us. They know their business."

And every card comes with a strong training and education component. Everyone on staff must learn how to use the card and report their expenses. Rosenblatt even trained his CEO. "We have a saying," he explains. "No training, no card, no exceptions."

Once the card is used, employees reconcile their charges on expense reports—complete with general ledger codes and receipts. It's a supervisor's job to look at every transaction and raise red flags. "The supervisor is the primary gatekeeper, the most important control in the system," Intermountain's Goates says.

Still, most financial officers audit monthly accounts. Many randomly pull a percentage of expense reports (PeaceHealth randomly selects 20 percent) and check charges that exceed a certain limit, like $1,000. Others look at specific departments or individuals who have had a history of questionable expenses—"cowboys," as PeaceHealth's Kaylor calls them.

"Our philosophy is that it's the manager's responsibility to catch if an employee is abusing the card," Kaylor says. "But our reality is that we end up looking at 40 percent to 50 percent even after the manager has approved them."

Some trouble signs are easy to spot; software can track errors like incorrect ledger codes. More serious abuses can be harder to detect. (See sidebar on page 19.) Still, most card problems result from "people being careless, not criminal," Kaylor says. Users may mix up their cards and accidentally make personal purchases on business accounts. Many employees self-report their mistakes. True fraud cases are rare. SSM fires about one employee a year for p-card fraud, Rosenblatt says, while PeaceHealth says they've exposed termination-worthy fraud only twice in 10 years.

"For people who are not informed about the system, they're always worried that [p-cards] will lead to employees running amok and taking us to the cleaners," Rosenblatt says. "Nothing could be further from the truth. Controls and monitoring almost always ensure that the system stays clean."

At the same time, fears that p-cardholders will go on spending sprees haven't materialized at Intermountain. "Costs don't go out of control because people have more access to funds," Goates says.

"That's just a myth. Our people are still staying within their budgets."

Savings plans

But it's harder to determine whether p-cards actually save money. Certainly, experts say, they contribute to cost avoidance. Most figures confirm that normal purchase-order processing adds $60 to $70 in handling costs. P-card transactions, on the other hand, add about $10 to $15 per transaction. For large systems like Intermountain, which bills more than $3 million per month on the cards, the cost avoidance can be significant. At PeaceHealth, Kaylor says p-cards eliminated 30 percent of invoices in two years.

"I don't think we necessarily take hard dollar costs out of the system, but there's a soft cost avoidance for sure," Goates says.

And p-cards have opened the door to other efficient purchasing options. Intermountain has explored e-payables—or single-usage accounts—for one-time buys. Instead of handing a vendor a slip of plastic, the system's bank generates a card number for a single transaction. "A lot of our conservative CFOs were concerned that, with p-cards, we put the approval after the fact, after the purchase had already been made," Goates recalls. "A single-use account puts the normal approval process on the front end."

PeaceHealth has set up what they call a "payment-plus" account for repeat vendors on their biggest orders. Vendors are given "ghost" cards—account numbers that they charge repeatedly. The high-volume traffic allows PeaceHealth to negotiate long-term deals, Kaylor says. And the payment-plus plan eases p-card transactions for big-ticket items.

"If you use the card for utilities, for example, you want all the utilities for that company on the same account," she says. "You don't want Joe Blow in facilities calling up the electric company each month and giving his card out," Kaylor notes. With the payment-plus process, "the vendor essentially pays himself."

For Rosenblatt, the best way to measure p-card success is through employee satisfaction. "We didn't implement [p-cards] to save dollars on back-end processing," he says. "We did it as a way to make our users more productive." The SSM Health Care p-card system ranks higher on satisfaction ratings than any other job aspect, including contracting, purchasing and "all the things I'm supposed to be doing for a living," Rosenblatt laughs.

John DiConsiglio is a freelance health care writer based in Arlington, Va.

This article first appeared in the March 2010 issue of Materials Management in Health Care.

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