Medical Accounts Receivable Factoring: A Cash Flow Solution for Healthcare Providers

As a medical provider your biggest asset is your accounts receivable (“A/R”) – the payment you expect to get from Medicaid/Medicare, HMOs, private insurance, personal injury lien settlements, or worker’s compensation insurances.  Unfortunately, due to the current inefficiencies and bureaucratic nightmares in our healthcare system, a medical provider has to wait 15-150 days, or more, to monetize this asset.  That hinders the provider’s ability to conduct business, pay staff, order supplies, pay rent, advertise and grow the business.  Most providers turn to their local banks for working capital loans, but most of these banks have limits, strict requirements and hindrances that make it difficult to obtain these loans.  Some banks don’t want to lend against A/R while others only focus on large medical providers with substantial history.

Luckily, providers have other cash flow options – MEDICAL FACTORING!

Medical factoring is a type of invoice financing where a factoring company provides a medical provider with an advance payment based on the provider’s outstanding accounts receivable (claim/invoice).  The factor advances funds and waits for the claim to be paid from the third party insurance carriers.  Medical factors will consider any provider that bills third party insurance carriers, i.e. doctors, doctor groups, DME/HME, Home Healthcare companies, Medical Transport and Transportation companies, Imaging Centers, Labs, Urgent Care Centers, and many more.  Here’s how it works:

1. A medical provider establishes a relationship with a factoring company.

2. A medical provider submits bills to the 3^rd party insurance carrier.

3. A medical provider submits a copy of the billings to the factoring company in a format and procedure compliant with HIPAA regulations.

4. The factoring company advances between 70-80 percent of the NET COLLECTABLE VALUE.  This is important since the advance is not based on gross billings, but rather on the expected net collectable value.  Funds are wired or directly deposited into the provider’s bank account within 24-48 hours. This timing and advance rate will change if your receivable is related to personal injury or worker’s compensation.

5. The remaining 20-30 percent is a financing cushion or reserve in case some bills do not pay or are erroneous.

6. Once the bill is paid by the third-party insurance carrier the factoring company returns the 20-30 percent reserve money minus a factor fee ranging from as low as 1.5-3 percent for the first 30 days then 0.5-1 percent per 15 days thereafter.  Usually there are no upfront costs as all the underwriting expenses are paid out of the first funding (typically $300-$1500).  Some may charge a due diligence fee upon signing of the term sheet.  Large healthcare providers (such as hospitals) may require an on-site audit.  They also might qualify for a line of credit secured by the receivables.

Medical receivables factoring is a great way for medical providers to bridge the cash flow gap that is oftentimes created by slow payments from insurance carriers and other third-party payers.  The beauty of medical factoring is that it is determined solely by the provider’s ability to generate bills (claims/invoices) thereby providing access to capital for smaller or non-bankable providers.  There are no limits – you grow, you factor.  Most importantly, the provider now has a clear understanding of when cash flows will come in and can finally create a bill payment routine allowing for him/her to concentrate on treating patients!

How to Choose the Best Medical Factoring Company

Selecting the right medical factor is critical, given the importance of this type of financing for the growth of your business.  However, choosing the right factor may seem difficult because not all factoring companies will finance medical receivables and the ones that do, you need to ask the right questions.

Follow these steps to help you choose the right medical factoring company.

Step 1 – Find Candidates

The easiest way to find medical factoring companies is to search for them on the Internet.  Alternatively, ask colleagues in the healthcare field to recommend companies.  I suggest the latter since your colleagues can give personal testimonials on the factoring company’s performance.

Step 2 – Evaluate Candidates

The next step is to interview the factoring companies.  It’s best to develop a list of questions beforehand.  However, the following list identifies some questions to ask.

a.)    How long in business?

The medical factoring industry has been growing rapidly.  There are a number of new companies in the business.  Ideally, you want to work with a company that has been in the business for a few years and is HIPAA compliant.  If the company is new, ask if any of the founding executives have prior experience.  Also, ask how they are funded – are they using their own investments, hedge funds, or a line of credit?

b.)    In what areas do you specialize?

Some medical factors are generalists, but most focus on specific industries, such as hospitals, nursing homes, medical offices, or diagnostic imaging centers.  Make sure that the factors you speak with and select are comfortable with your specific field.  If you are unsure, ask the factors to provide references.

c.)     Do you charge a due diligence fee?

This question is important since due diligence fees vary a lot from company to company.  Some charge fairly high upfront fees, while others charge nominal fees which sometimes can be deducted from your first funding.  Make sure you understand how much they charge and what they use these funds for.

d.)    Will I need to pay for an audit?

Medical factoring companies often conduct an audit of your billing practices before providing financing.  Factors want to make sure that you are billing insurance companies correctly and that you are getting paid as expected.  Larger healthcare institutions (especially hospitals) may require an on-site audit, which can be expensive.

e.)    Can you work with Medicare/Medicaid?

Most medical factors can work with conventional insurance companies (e.g., HMOs, PPOs, etc.).  However, only a few factors can work with Medicare and Medicaid claims.  Medicare and Medicaid claims cannot be assigned like a conventional insurance claim.  Consequently, the factor needs to use a special process to finance those claims.  If you invoice Medicare and Medicaid, make sure that the factoring company can finance those claims.

f.)     What opportunity size are you most comfortable with?

Most factors claim that they can finance a large range of opportunities – say, from $50,000 to $5,000,000.  Some might go as low as $25,000 as long as you have at least 6 months of billing and collection history.  Most factoring providers specialize in opportunities of a certain size.

Step 3 – Identify the Best Proposals

Comparing factoring proposals is not always easy, since companies offer different programs.  You generally need to find the average cost per dollar for each proposal so you can make an accurate comparison.  Note that the factoring rate alone is not always a good indicator of total cost.

Also, keep in mind that the cost is only one aspect that you should be investigating.  You should also consider:

1. Are they easy to work with?

2. Are they forthcoming with information?

3. Are they helpful?

4. Do you feel comfortable with them?

Step 4 – Final Selection

Once you have reviewed the proposals, make a final determination.  Select a company that you are comfortable with and that offers a competitive program.  If you don’t have the time to do this research, you should consider working with a broker that has access to these medical funding sources who can do the work for you.  They usually don’t charge a fee since they get paid directly by the funding source.

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