How Medical Receivable Factoring Works

If you’re running a business in the health care industry, it’s guaranteed that sooner or later you’re going to have a problem with cash flow. And that’s where medical receivable factoring comes in.

There are two reasons for this. One reason is that you’re going to have to spend a lot of money on day to day expenses. Whether you’re a vendor selling goods or services to clinics or you run a clinic that helps treat patients, expenses are a fact of life in the medical industry. A clinic, for example, will need sufficient ready cash to cover payroll, pay for rent and utilities, make the regular payments for the equipment, and purchase regular medical supplies such as gloves, syringes, bandages, and medicines.

Another reason is that health insurance companies can really slow down your cash flow cycle. While your suppliers may require you to pay up front or in 30 days, insurance companies can take up to 120 days to settle the bill. What’s really aggravating is that you’d have to follow up on them regularly, and even then they may not pay the full amount.

So how does medical receivable factoring work?

  1. Factoring for vendors. In this scenario, your customers are the clinics who treat patients. When you bill them, you send the receivables to the factoring company which then gives you the advance of about 80% of the value of the invoice. The factor then waits for the clinic to pay them in full, and then the rest of the payment is sent to you minus the fees of the factor. It’s pretty much a straightforward arrangement.
  2. Factoring insurance claims for clinics. This version can get a bit more complicated. It’s the same basic format, in which the factor forwards you an advance and then the rest of the payment is sent to you once the insurance company has settle the claims. Usually the factor deals with the insurance companies by sending a notice of assignment, and experienced factors realize just how long it will take so that they don’t charge you outrageous amounts when they take 120 days to pay.

However, insurance companies are also known not to pay the full amount. So if this happens, the factor doesn’t reimburse you for the missing amount. In fact, the factor may hold back 20% of the receivables in a reserve account to cover instances when the factor pays less than the advance you get. So if you get 80% in advance and the factor ends up getting only 70% of the value of the receivable from the insurance company, the factor takes money from the reserve account to cover the advance and the fees charged by the factor.

  1. Factoring Medicaid and Medicare claims. As you know by now, factors operate by requiring your customers to pay them directly instead of sending the payment to you. Unfortunately, Medicare and Medicaid don’t allow you to assign the claims to a third party such as a factor. Medicare and Medicaid will only pay you directly, and won’t send payment to your factor.

This problem must be discussed with your factor, but an experienced factor already knows how to set a managed account, which is also known as a sweep account. This account is in your name and ownership, so Medicare and Medicaid can send the payments to this account. At the same time, the account gives full operational control to the factor, so the factor can collect the payments and its fees and also settle the invoice for you.

All these may seem complicated, but when you’re dealing with a financing company that has experience in medical receivable factoring, it’s actually very simple.