If cash flow is a recurring problem in your practice, consider this route to putting your accounts on an even keel.
AS A MEDICAL PROVIDER, YOUR BIGGEST ASSET is your accounts receivable (A/R) — the payments you expect to get from the sources you bill. Cash payment is immediate, but rarely so when it comes to dealing with third-party payers. As you have undoubtedly discovered, insurers do not uniformly process your claims in a timely manner.
The problem seems built into the process. Due to the inefficiencies and bureaucratic nightmares in our healthcare system, the typical medical provider has to wait 15 to 150 days (or more), to realize payments for claims and convert invoiced A/R into tangible funds. This can hinder your ability to conduct business, pay staff, order supplies, pay rent, advertise, and ultimately grow your practice.
Most providers turn to their local banks for working capital loans, but increasingly these days, banks have limits, strict requirements, and other hindrances that make it difficult to obtain such loans. Some banks don’t want to lend against A/R, while others only focus on large medical providers with substantial history.
Enter medical factoring
Medical factoring is a way of selling your A/R, in which a financial institution (the factor) provides you with an advance payment based on your outstanding accounts receivable (your invoices). The factor advances funds and waits for the invoices to be paid from third-party insurance carriers.
Medical factors will consider any medical provider who bills third- party insurance carriers (e.g., Centers for Medicare and Medicaid Services, HMOs, private insurers, personal injury lien settlements, and Workers’
Compensation). Here’s how it works:
A medical provider establishes a relationship with a factor.
The provider submits bills to third-party insurance carriers.
The medical provider submits a copy of the billings to the factor.
The factor advances up to 8 percent of the net collectable value. Notice that 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, usually within 72 hours. The exact timing and advance rate can change if the A/R is related to personal injury or Workers’ Compensation.
The remaining 20 percent is a financing cushion or reserve in case some payers do not pay or the claims are erroneous.
Once the bill is paid by the third-party insurance carrier, the factor returns the financing cushion minus a factoring fee of 2 percent to 6 percent per month.
The attraction of medical factoring is that it is determined solely by the provider’s ability to generate bills (invoices), thereby providing access to capital for smaller or non-bankable providers. There are no limits — the more you grow, the more you can factor. Most importantly, the provider now has a clear understanding of when cash flows will come in and can concentrate more on treating patients.
Another benefit of medical factoring is the opportunity it gives the provider to expand business by treating additional patients. Eric Bryant, DC, owner of ChiroMed Plus, a North Carolina-based practice, shares his experience:
“What I like about medical factoring,” Bryant says, “is the access to cash when I’m in a tight spot. It also provides me capital to expand by adding another arm to my practice.
“I used the funds from selling my accounts receivable to increase my personal injury business. It allowed me to market to attorneys who specialize in the space as well as get training on the correct way to fill out insurance forms to maximize my reimbursements,” he adds.
Bryant, who has been using factoring with his A/R for approximately six months, goes on to say, “I am also now considering opening up a new location in an area of town better suited to attract personal injury patients. In general, given the insurance companies’ current delaying tactics, I think medical factoring is a great tool for chiropractors across the country.”