Medical Accounts Receivable Financing
Young and emerging medical organizations can grow quickly into large providers of various medical services. Population growth in key urban areas along with an aging population have fueled dramatic growth in just about all fields of medical service. These growing organizations need access to cash more than ever, especially during the first five years of operation. Many bankers have a real appreciation of the unique characteristics of this market because they have attempted to provide more than term note options. Some key distinguishing factors that set medical risk apart from traditional industry risk are:
- Billing/claims submission to multiple guarantors
- Claims subject to multiple adjustments “after” the bank has advanced the funds
- Involvement of third-party payers
- Government regulatory changes
- Contractual allowances made between parties
- A/R turns that often exceed 100 days as a normal course of business
- Third-party reviews of utilization and coding that could cause the provider to fail
- Credentialing and state licensing requirements
- Intricacies of the aging report, such as gross-versus-net billing and “unbilled services”
Each characteristic represents a potential source of confusion for a credit officer attempting to fund medical accounts receivable financing. For example, when ABC Manufacturing, Inc. creates an invoice for $1,000, we assume that the customer will pay $1,000. In the medical industry, however, full payment of a $1,000 gross claim would be rare. In many cases, contractual agreements between the provider and the insurer will call for payment anywhere from 50%-80% of the original stated value of the claim. Without knowledge of such agreements, banks risk over-advancing funds to providers and assuming significant risk in the process. The bank must find ways to mitigate this industry-specific risk.
Medical Accounts Receivables (A/R), are likely a healthcare service’s and medical provider’s, single largest balance sheet asset. A provider with third party claims has the ability to unleash the power of this otherwise “lazy” asset (A/R) into a powerful tool that will meet all current cash needs including practice or service growth and development. Medical Account Receivable Financing is a non-traditional financing method that has significant benefits when compared to traditional bank financing.
You can meet the challenge of rising costs, diminishing reimbursement, increasing demands caused by the “baby boomer” population and changing technology. Rising costs threaten the practice’s and the provider’s income. Rapidly changing technology threatens a provider’s ability to offer the most up-to-date services. Growing patient demand will crowd facilities causing patient dissatisfaction. Access to additional working capital will overcome all of these challenges.
Traditional asset based loans or lines of credit have limited benefit and flexibility. While a business loan or line of credit may help in the short term, it is unlikely to continue to solve increasing working capital needs. The line of credit’s arbitrary credit ceiling and the required negative cash flow for repayment limits its usefulness. Unless the bank is willing to increase this artificial ceiling, the practice or service can expand no further. All of its credit is utilized and its collateral is held by the bank. In addition, bank loans almost always require personal guarantees that are not required by medical accounts receivable financing.