Cash Flow Problems For Hospitals – Is Supply Chain Finance An Answer?

How bad is the financial crisis in the UK’s National Health Service? One worrying indicator is the number of Health Trusts (who run hospitals and other health services) who aren’t paying their bills on time. The Health Service Journal (HSJ) reports that more than a quarter of hospital trusts are now routinely delaying payments.

It’s reasonable to assume that this is happening because those Trusts are in pretty desperate financial situations themselves. But this is unethical as well as poor business practice, and it can have serious implications for the supplier if their own financial situation is at all vulnerable.  We don’t know if Trusts are being selective over which suppliers have money withheld, and it may be that Johnson & Johnson or a major PFI provider can cope - but for smaller suppliers, such action can be serious or even fatal.

Suppliers are also in a difficult position given the nature of their customers. No firm wants to refuse to supply a hospital, and be accused of causing harm or even death to patients because of that, but there may not be many alternatives. Suppliers can charge interest now on late payments, at a rate of 8% plus the Bank of England base rate, but not many actually do this. However, it might be a sensible tactic in this case, at least to emphasise to the customer that this is not acceptable practice.

Yet hospitals are also in a desperately difficult position. Some are close to running out of cash, according to the HSJ who also report that a “London foundation trust (Kingston Hospital) was relying on a working capital facility from Lloyds Bank to pay staff each month”.

This is better news for one group though; firms offering supply chain finance options, who may now find they can really start to get traction in the health sector. Sure enough, Oxygen Finance recently announced a contract with NHS Wales, Oxygen’s first in health after some years of slow but steady progress in the local government world.  A solution where suppliers can get paid on time in return for a small “fee”,  but buyers can delay their payments for another 30, 60 days or more would seem to be a win:win for everyone.

According to Supply Management, “NHS Wales has an annual spend of over £4bn on goods and services and the early payment programme is estimated to deliver savings of around £9m over the contract period”.

Other firms such as Basware and Taulia are looking to apply SCF tools and principles in the public sector, and there still appears to be plenty of funding available in the market for these options.  As long as Trusts are considered a good credit risk (which might eventually become an issue if the underlying issues don’t get resolved), then the health sector looks likely to see rapid growth in this type of initiative.

First Voice

  1. Mr Grumpy:

    Not an uncommon or new issue to be honest. Worked in a NHS Trust in which we had plan carefully how many outstanding invoices we paid each week to ensure the Trust didn’t over-stretch it’s monthly forecasts and even as far as 2008 many NHS Trusts were embracing early settlement approach to the payment of invoices with numerous suppliers with varying benefits. It’s not great practice, but an NHS Trust’s cashflow pardon the pun is about balance.

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