Medical Receivables Factoring Provides Cash Flow

It wasn’t too many years ago when the purchase of medical practices from hospitals was a significant trend in the health industry. The idea was that the hospitals would benefit from a surge in referrals, but the doctors would not have the trouble of managing their practice and would earn more and work less.

Unfortunately, this peachy scenario has not always worked out, and many doctors terminate their contracts with hospitals. Most doctors don’t have a problem maintaining their client base because most patients follow them into private practice. The main problem is the Healthcare Receivable Accounts Management, and particularly financing.

Medical Receivables Funding

While the practitioner will have no problems getting funding for capital spending, a more persistent issue is how to cover costs and payroll accrued during the 60 to 90 days it takes for third-party payers to release funding. When doctors and other services get financially squeezed by reducing prices due to demands, funding becomes inevitable.

Also, the most efficiently operated practices require short-term working capital as their companies expand. Since there could be a substantial gap between the amounts needed to be paid compared to the face value of the billings, banks are incapable of using medical receivables as collateral. As a result of this need, healthcare financing firms have emerged to provide funding for medical receivables.

In a medical factoring case, the financing firm purchases the practice’s outstanding receivables, thus taking a share of equity in the receivables. Since the receivable’s status has shifted, the procedure often transfers the default risk to the source of funding.

Benefits of Medical Receivables Funding

• There is no monthly debt charge because it is not a loan financing.
• The deal is off-balance sheet because the company sells an asset.
• The consumer can obtain new cash each week, thereby providing a sustainable flow of funds.
• Since the receivables are the only assets that are burdened, the healthcare organization may seek specific forms of funding parallel to this program.
• Factor rates appear to be much smaller than those charged by a billing firm.
• No individual guarantees are needed. The factoring firm has a greater interest in the payer’s credit.

The Funding Process

• The contractor completes a company application and submits it along with a due diligence fee to the funding source.
• The source of funding sends out a Letter of Intent, specifying what can be done for the healthcare provider.
• The funding source draws up a Purchase and Sales Agreement for the company after receiving the signed Letter of Intent. This contract shall specify the provider, the fees, and the advance rate.
• The funding source conducts final due diligence and reports on the quality of the billing and payment program to the client’s management.
• The factor advances to the company’s bank account, 70 percent -80 percent of total collectible receivables.
• The remaining amount (invoice total less the advance less the factoring fee) is transferred to the customer’s account when the invoice is paid to the factor.

EndNote

Medical receivables factoring is a reasonably new industry, but it is also increasing rapidly. It offers the providers much-needed working capital to meet costs, make investments, and take advantage of early payment discounts.