It all began in the rag trade and retail industries, where $10 payment errors and $2 overcharges quickly add up to big cash.
Today, the multibillion-dollar business of unearthing "lost profits" from mountains of purchase orders and vendor invoices has grown quite competitive and appears to be headed for consolidation.
Firms that recover overpayments made by hospital and healthcare providers, in particular, have become acquisition targets as a handful of companies attempt to broaden their scope of services. Several firms contacted by MODERN HEALTHCARE say they've fielded calls from larger companies looking to grow their businesses.
In recent weeks, Profit Recovery Group International, the nation's only publicly traded recovery audit firm, has acquired two companies in the healthcare recovery audit business. The Atlanta-based company, an amalgamation of several recovery audit firms, went public in March 1996 and is actively adding to its $77 million empire.
With its acquisition of Accounts Payable Recovery Services in Houston and Hale Group, Newport Beach, Calif., the company picked up two of the bigger players in healthcare.
No more than a handful of large players occupy the profit recovery niche, but the number of mom-and-pop firms serving local and regional clients has multiplied in recent years, companies say.
And some of the big players have close familial ties.
PRG Chairman and Chief Executive Officer John Cook traces the company's roots to Sam Parks, who got his start in the retail auditing business a quarter century ago. According to PRG's 1996 prospectus, Cook's brother David, sister-in-law Harriette, sister Pamela, daughter Christine and brother-in-law Allen R. Sluiter all work for the company.
The Hale Group, one of PRG's acquisitions, was founded by Clayton Hale, who learned the business from his father. Nearly 20 years ago, Clayton's father, Herman, who is now deceased, founded Sebring, Fla.-based Herman Hale and Associates, a payment recovery firm whose clients include Fortune 500 companies and healthcare providers. Herman Hale also worked with Parks, one of the field's pioneers, before moving out on his own.
The entry of new players in the field has upped the pressure on everyone in the lucrative payment recovery business, which is why some companies are looking for opportunities to be bought out.
The healthcare industry is rapidly consolidating to reduce costs and generate efficiencies, notes Cook, who sees "enormous potential" for the company to boost its revenues.
Although computer technology is transforming the business of healthcare purchasing, it hasn't eliminated vendor payment errors.
"Now they're making overpayments at the speed of light," says Beverly Brando Gillilan, president and CEO of Herman Hale and Associates.
By combing through electronic and paper records, audit firms frequently discover errors worth hundreds, thousands or even millions of dollars to their clients.
PRG hopes to edge out competitors through the use of electronic data systems. The company expects to invest about 10% of revenues this year in new computer support systems.
Hidden profits can be uncovered from many sources, from overcharges on shipments of freight and data entry errors to overlooked discounts on volume purchases.
It's tedious work but can be lucrative for both the audit firm and its clients. Companies typically work on a contingency fee basis, retaining 50% of whatever they recover for their clients. Larger clients, though, often can negotiate better deals.
Recovery audit companies say they exist because hospitals cannot invest the time and capital required to find these lost profits. "If I come in and find $100,000, you just paid yourself $50,000 to get my information," says Brando Gillilan.
But are healthcare providers getting a good deal?
"There are getting to be more companies that have very loose credentials," charges John M. Weiss, president of the Audit Group, Labadie, Mo. Weiss, who says his company is the largest accounts payable auditing firm exclusively focused on healthcare, fears some firms are cheapening the industry by offering audit services at cut-rate prices and then performing shoddy work.
"I'm very concerned that I'm going to be associated with very bad competitors," says Weiss. For instance, he claims some companies are trying to complete audits in a matter of weeks that should take two to three months.
Brando Gillilan also worries that too many companies are making a quick buck on healthcare contracts rather than taking time to teach clients how to correct vendor payment problems. In fact, she says she recently created a separate company devoted to sharing tips and tricks of the trade.
Hospitals' biggest worry, though, should be how they are handling purchasing and payment transactions, some auditors say. With the movement to computerize records, providers may be destroying audit trails that prevent anyone from discovering potential overpayments and under-reimbursements.
"It's the old axiom of garbage in, garbage out," says Weiss. When invoice and purchase order amounts are entered without itemizing each purchase, "there's no trail to follow," he warns.