The Case for Automation

Once the claims were submitted to the various insurance providers, it could take several weeks--even months--to receive payment for services rendered. Some companies were painfully slow to pay. Ann was obligated to accept whatever reduced rate each insurance company was willing to pay based on her agreement with them. Ann depended heavily on insurance payments arriving in a timely manner. So far, such payments had covered Heritage's expenses for overhead ($1,000/month), salaries ($40/hour for therapists and $7-15/hour for staff), and taxes (15%). However, sometimes insurance providers made errors and did not pay all of the submitted claims, or claims were lost in the mail. Once such claims were resubmitted, the waiting process would start over. Kim sometimes spent hours on the phone with insurers trying to resolve issues. Receiving timely, steady payments was essential to the success and longevity of Ann's business. As a small company, it was extremely important for claims to be processed quickly to ensure a sustained, positive cash flow for continued operations (see Table 1).

Cash flow deteriorated when payments from insurers were delayed. Ann suspected that the cumbersome claims preparation and submissions process was the culprit after she discovered that only half of the amount billed was received within five weeks. Ann met with Kim to ascertain whether there was a way to expedite claims submissions. She knew that Kim was performing many duties in her role as office manager, as was often the case in small businesses. They needed to strategize and figure out what could be done to ensure quick, accurate claims preparation and submission in order to minimize insurance company turnaround time.

Ann wanted to identify bottlenecks and delays, so she asked Kim: create a map (see Figure 1) to illuminate the receivables process from therapy sessions to payments received. Ann and Kim concluded that automation might help. They examined a variety of software packages that could significantly reduce the time required to process insurance claims. Furthermore, a good software package might simplify many office tasks, allowing Heritage to integrate the entire client process.

After looking at many options, Ann and Kim selected Therapist Helper because it also served as a client database that could be used for scheduling and capturing the therapist's notes. Therapist Helper promised not only to automate the claims preparation process, but could also electronically submit claims to some insurance companies. It seemed ideal. With the new program, Kim prepared and submit claims in a fraction of the time she had been using. Unfortunately, the software was expensive; it cost $3,000, which was a lot of money for Ann's fledgling company. Ann was not certain the software would resolve the company's cash flow issues, and wondered if the benefits would exceed the risks. She also knew she needed to figure out some reasonable payback period to aid the decision process.

Table 1: Heritage Health Resources Cash Flow Expenses Daily Weekly Monthly Annually Rent $ 700 $ 8,400 Utilities $ 200 $ 2,400 Phone $ 100 $ 1,200 Salaries Therapists $ 400 $ 2,000 $ 8,000 $ 96,000 FT Staff $ 120 $ 600 $ 2,400 $ 28,800 PT Staff $ 28 $ 140 $ 560 $ 6,720 Totals $ 548 $ 2,740 $ 10,960 $ 131,520 Taxes $ 82 $ 411 $ 1,644 $ 19,728 Supplies/Other Expenses $ 50 $ 200 $ 2,400 Total Expenses $ 3,201 $ 13,804 $ 165,648 Receivables Client Receivables $ 750 $ 3,750 $ 15,000 $ 180,000 Other Sources of Income $ 250 $ 3,000 Total Income $ 15,250 $ 183,000 

Question: apply analytical tools such as marginal analysis to the case to evaluate the alternatives of acquiring/leasing the software.