The need

In today’s healthcare environment medical providers face tremendous challenges. The cost of operating a practice continues to rise, as does the time required to manage government regulations. Providers have to adjust to a new billing coding system called ICD-10, stay compliant in a digital age with HIPAA (Health Insurance Portability and Accountability Act) regulations, adjust to “meaningful use” requirements, maintain certifications, deal with rising malpractice insurance premiums, and make sure to stay on top of patient co-pays and deductibles, which have increased significantly since the ACA (Affordable Care Act) went into effect.

On the revenue side, medical providers are also confronting difficult issues. Claim denials and delays in payments from the insurance carriers have gone up considerably. This is causing a decrease in reimbursement and an increase in the amount of time it takes to get a claim paid. Additionally, the delays in payments lead to inconsistent cash flow which makes it more difficult to operate.

As you can tell, medical providers are being squeezed more than ever before and are looking for outside help with cash flow solutions. I have taken the liberty to outline the main medical receivables financing options below:

Financing options for medical providers

1) Loan from a conventional bank – the first place many providers turn to is their local bank. This is usually the most inexpensive option if a provider can qualify for the loan. The issue with this option is that banks are generally reluctant to give out business loans secured by medical receivables and have tight credit requirements. The following hurdles exist for medical providers looking for traditional bank financing:

  • Banks normally do not understand medical accounts receivable and, therefore, will base the decision on a provider’s cash flow. The banks will want to see several years of operational experience and positive earnings. This means that young practices, and those who recently faced financial challenges, will not qualify.
  • The owner of the practice cannot have credit blemishes, recent bankruptcies or tax liabilities.
  • The amount of credit the bank makes available is usually based on the provider’s past performance and does not take into account future growth potential. This can leave a provider in a position where the loan is not high enough to meet its capital needs.
  • The time it takes to underwrite and go through the bank process can take several months. In the case of a practice that has cash flow issues, this may be too long.

2) MCA (Merchant Cash Advance) – also known as ACH loans, daily debit loans and bank statement advances. Over the last several years the proliferation of this finance product has increased dramatically. The main benefit of this product is the fast funding time as most companies offering this product can fund a loan in under a week, even within 48 hours. This is great when a practice has an immediate need, such as making payroll. The downside of MCAs is twofold. First, MCAs are very expensive. The true cost of these advances range from 30% to as high as 100%. Second, MCAs are typically paid back through a daily automatic debit from the provider’s bank account. So, a practice with cash flow issues now has the added burden of making daily payments even if there is a delay or decrease in revenue. This option can be used occasionally, but is not a long-term solution.

3) Medical Accounts Receivable Factoring – Accounts receivable (AR) is usually the biggest asset of a medical practice. Unfortunately, due to the inefficiencies in our healthcare system, a medical provider has to wait 15-150 days, and sometimes more, to monetize this asset. Medical factoring is a type of invoice factoring where a financial institution (factor) provides a medical provider with an advance payment based on the provider’s outstanding accounts receivable (invoice).  The factor advances funds and waits for the invoice to be paid from third party insurance carriers.  Medical factors will work with any provider that bills third party insurance carriers, e.g. doctors, doctor groups, Durable Medical Equipment companies, Home Healthcare agencies, Drug Rehab centers, Skilled Nursing Facilities, Hospitals, Pharmacies, Medical Transport companies, Translation companies, Imaging Centers, Blood Labs, Urgent Care Centers and many more.  Here’s how it works:

  • A medical provider establishes a relationship with a factor.
  • A medical provider submits bills to the 3rd party insurance carrier.
  • A medical provider submits a copy of the billings to the factor.
  • The factor advances up to 80% of the estimated or 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 deposited into the provider’s bank account within 72 hours.
  • The remaining 20% is a financing cushion, or reserve in case some bills do not pay or are erroneous.
  • Once the bill is paid by the 3rd party insurance carrier, the factor returns the financing cushion minus a factor fee of 1-2.5%/month.

There are a number of key benefits to medical factoring. For starters, medical factoring is available to most providers who do not qualify for bank financing. A medical factor will usually be able to offer a provider more capital than a traditional bank that is only basing its loans on previous cash flow history. The cost of factoring is significantly cheaper than MCAs. Factoring facilities can accommodate growth; as the provider bills more invoices, the provider receives more advances. Factoring helps stabilize cash flows so a provider can plan for growth and be assured that its expenses will be covered by the factor’s advances. Last but not least, since medical factoring is a niche product, only factors who specialize in this space offer it to providers. This means that a medical factor will understand revenue cycle management, billing, coding, and collection of medical claims. The factor will also have intimate knowledge of the denial and delay tactics of insurance carriers, and at times will be able to consult providers on best practices to collect claims at higher rates and with less time.

I have included the following case studies to highlight the benefits of medical factoring:

  • The first case study is of a home healthcare company (Client) that was seeking a funding solution to help with its growth. The Client sends nurses and aides to the homes of patients who need assistance with daily tasks. This Client’s main payor was the state Medicaid system. Each time a new patient was added; Medicaid would take 60 days to onboard the patient and begin processing payments. The Client would need to pay out of pocket for the aide, sometimes 24/7 care, for 60 days before receiving reimbursements. This Client was growing organically, but very slowly, as the most it could afford was to take on 1-2 new patients per month. With the help of medical factoring, the client was able to take on many more new patients per month because the advances from the factor were helping the Client pay for the aide’s labor costs, even before Medicaid began its reimbursements.
  • The second case study is of a pharmacy (Pharmacy) that provides medication to long term care facilities such as nursing homes and assisted living centers. The Pharmacy was averaging 30 days to get reimbursed from its payors, which is relatively good in today’s healthcare environment. The Pharmacy was offered a discount from its suppliers if it paid early. The discount from the Pharmacy’s suppliers often surpassed the cost of factoring the medical invoices so the Pharmacy used the advances from its medical factor to pay its suppliers early and benefit from this discount.

4) Medical Accounts Receivable Financing – This offering is very similar to medical receivables factoring.  The main difference is that instead of selling the receivables to a factor the healthcare provider borrows against the receivables.  It’s a loan that is secured by the business with the medical receivables as the main collateral.  The advance is the same, up to 85% of the estimated collectable value, and the interest rate can vary depending on the financial strength of the medical provider.  Typically, the Lender will add financial covenants and guaranties and will do a more thorough analysis of the provider’s financial condition.  As with medical receivables factoring it’s important to have a strong understanding of the medical billing and collection process and be up to speed with the ever-changing regulatory environment.

In conclusion, medical providers will continue to be challenged in the near future with increasing regulations and inconsistent health insurance reimbursements. To survive—let alone thrive—in this healthcare environment a medical provider will benefit greatly from having a funding partner to help navigate these uncertain waters.