Making Sense of Medical Factoring

Many factoring brokers steer clear of medical receivables factoring because they think it’s too hard to get a health care deal funded. I’m here to tell you otherwise.

All you need is a general understanding of the types of companies that can benefit from medical factoring and a couple of strategic partnerships with the right health care factoring firms.

Within the health care industry, there are basically two types of companies that tend to have cash flow issues—Medical providers (i.e. hospitals, physicians’ groups, medical practices, etc.) and the vendors who sell to medical providers (i.e. medical staffing agencies, medical transcription services, outsourced medical coding companies, etc.).

Medical providers suffer from cash flow issues when third-party payers take months to pay for them for their services, forcing those providers to hold off on paying their vendors. Needless to say, when medical providers take their time paying vendors, it has a profound effect on the vendors’ cash flow as well.

Third-Party Medical Receivable Factoring Decoded

Medical receivables factoring (often referred to as third-party medical receivable factoring) introduces a third party payer (i.e. Medicaid, Medicare or private insurance carrier) into the invoicing process. Specifically, medical factoring works like this:

• The medical provider sends its bill to a third-party payer (i.e. Medicaid/Medicare, HMOs, private insurances, personal injury lien settlements, or worker’s compensation insurances, etc.) for the medical services performed.

• At the same time, the medical provider supplies a copy of the invoice to a third-party medical receivable factoring firm.

• The factor will purchase the provider’s invoice and advance up to 80% of the expected net collectable value within 24-72 hours.

• The medical factor retains the 20% (reserve) to use as a buffer in case the medical provider’s bill is not paid or if there was an error in the billing.

• Once the medical factor is paid in full for the invoice it purchased, the reserve, less the factoring fee, is released back to the provider.

Doctors’ offices, medical clinics and laboratories, ambulatory services, hospitals and nursing homes – All of these companies can greatly benefit from selling their invoices to a medical factor. All of these medical providers can use factoring to bridge the cash flow gap that is oftentimes created by slow payments from insurance carriers and other third-party payers.

The Other Type of Medical Factoring—Health Care Vendor Factoring

Even though health care vendor factoring may not be as well-known as third-party medical receivable factoring, it’s still an important piece of the health care cash flow puzzle. Medical providers routinely wait to pay their vendors until after they receive payments from Medicare, Medicaid and/or insurance companies. Specifically, temp nurse staffing agencies, medical transcription services, outsourced medical coding companies and outsourced medical billing services are all examples of health care vendors that tend to have cash flow issues as a result of slow paying medical providers.

Furthermore, the health care vendor factoring process is similar to the third-party medical factoring process, sans the third-party payer:

• The health care vendor sends invoices to a medical provider for services rendered or goods provided.

• The health care vendor also sends a copy of those invoices in addition to any supporting documentation (i.e. signed time sheets) to a factoring firm familiar with funding business to business transactions within the healthcare industry.

• The factoring company purchases the invoices and advances somewhere between 70-90% of their face value.

• Similar to the third-party medical receivable factoring model, the health care factoring firm will hold the remaining 20% (reserve) as a buffer in case a provider disputes the invoice and/or doesn’t pay it promptly.

• The reserve, minus the factoring fee, is remitted to the vendor upon receipt of payments from the medical providers.

As you can see, although a little less well-known, health care vendors that provide services to slower-paying medical providers can also benefit from medical factoring.

Now that you know the difference between health care vendor factoring and third-party medical receivable factoring, the next step is to locate factoring firms that can sufficiently close and manage those types of deals. When researching factoring firms, a good place to start is the International Factoring Association (http://www.factoring.org). The last step is to find medical business owners in need of factoring!

Nikki Flores is a Consultant Liaison for PRN Funding, LLC, which is an extraordinarily focused niche player in healthcare factoring.

PRN Funding exclusively factors the accounts receivable of companies that sell goods or provide services to healthcare providers.