Medical Receivable Factoring

Healthcare is an important part of all of our lives. At some point or another almost everybody will visit a doctor or a medical center in order to receive treatment. Almost everybody will have to work with their insurance to pay off their medical bills as well.

Most of us only ever see the side where we are paying the bills, but we fail to look at it from the Doctor’s point of view who is receiving the money. Medical centers usually have to wait around 70-75 days before they receive any money for work they are doing today. This makes it extremely hard to run a medical center. Imaging trying to pay for your house payment, groceries, clothing, and other needs if you only got paid every 75 days. I’m willing to bet that most people in America couldn’t survive 75 days without a paycheck given the staggering amount of people who are living from paycheck to paycheck. The truth is that medical clinics have bills to pay too and they need money to do it.

In the past many have criticized doctors for not understanding how accounts receivable works. They have blamed doctors for their slow collecting times. The real problem isn’t with the doctors; in most cases the real problem is with the patients and the insurance agencies. Patients often take a very long time to pay off their medical bills either because they don’t want to or they can’t. Insurance agencies are famous for trying to get out of paying for claims, and when they do pay for claims they do it as far down the road as possible. Instead of helping this problem, the Democrat-led congress seems to be heading in another direction as their motto has been, “pay doctors less amounts, and do so over longer periods of time.”

The future of collection times for doctors looks bleak, but there are some emerging solutions; one of which is medical receivables factoring.

How Factoring Works for Medical Centers

Note that there are several different ways factoring invoice works and the contracts/agreements can vary dramatically. The following is simply the foundation of medical factoring.

When a medical center treats a payment it incurs an amount of money that is receivable from the patient: known as an account receivable. Most of the time the patient doesn’t pay the whole amount: the other part of the balance is paid by the insurance companies. So medical centers have receivables from patients and insurance agencies. Money receivable from an insurance agency is often referred to as a claim (a claim on money). While doctors can sell receivables from patients, it is probably more common in practice to factor insurance claims, so we’ll use insurance claims for discussion purposes.

A medical center can enter into an agreement with a factoring company where the medical center sells its insurance claims to the factor at a discounted price. The factor will give the medical clinic an advance of a value anywhere between 60-85 percent of the insurance receivable. A timeline is provided below to illustrate the factoring process.

Once the claim is sold, it is now the factor’s responsibility to collect from the insurance agency. Assuming the 65 day industry average holds then the factor will receive the money for the receivable after 65 days. At that time the factor remits the remaining amount owed minus the factoring charge (usually somewhere around two to four percent per month).

How Charges and Advances Are Determined

Remember that in medical receivable factoring, the factor is not working for free. They provide a valuable service for medical centers that allows them to get money sooner. In addition to providing a service, the factoring is taking on some risk that the patient or insurance agency might not pay. For these reasons the factor must charge a fee. The fee will be higher if the risk of not collecting is higher. With advances the higher the risk of not collecting the lower the amount the factor will advance on Day 2 of the medical accounts receivable factoring time-line above.

Another important issue to consider when determining fees and advances is whether the factoring arrangement is recourse or non-recourse. Recourse factoring arrangements mean that factor can seek recourse from the medical center if the insurance agency does not pay. This means that the center bares a little more risk, but it also means that the fees and advances will be better because some of the risk has shifted from the factor to the medical center. Non-recourse agreements are agreements in which the factor cannot seek recourse even if they never get paid for the receivable they bought from the medical center.

In summary, factoring can be a great way for medical centers to increase the average collection time of their receivables. This can steady the cash flows of the medical organization and it can provide opportunities for growth that otherwise wouldn’t be there.