Working with tight cash flows is one of the main challenges of running a medical office, diagnostic center, nursing home, or any business that invoices medical insurance claims. This problem is increasingly common because three trends are happening at the same time:
- Insurance payment amounts are decreasing
- Payment times are increasing
- Operational costs are increasing due to higher patient volume
Unfortunately, these trends do not describe private insurance patients and claims alone: Medicare and Medicaid claims have not fared any better.
This challenge has put many medical providers in a difficult position. They need to manage heavy patient loads and difficult cash flows in order to be successful. As a result, most medical companies need to use some form of financing to operate. Many companies have addressed this problem by financing their insurance claims. This solution provides immediate resources to cover business expenses, thereby alleviating working capital problems. Most companies finance their claims using medical factoring or similar solutions.
However, using factoring can be a challenge because factoring companies require that the providers assign the financial rights of their insurance claims to them. However, Medicare and Medicaid often forbid medical providers from assigning claims to third parties. For many healthcare providers, this problem may seem insurmountable.
(Editor’s note: You can learn more about this financing solution by reading “what is medical factoring?“)
The problem with assigning financial rights
There are two types of Medicare and Medicaid assignments, which can often confuse clients. In reality, only one of these assignment types is relevant to factoring medical receivables.
As a provider, you accept the assignment of a payment by a patient as full payment for your services. This payment often comes in on a 15 to 70 day schedule, depending on operations and your agreements. This type of assignment is not affected by factoring and remains the same.
However, if you want to finance your Medicare or Medicaid claims, the financial rights of the claim must be assigned to the medical factoring company. The problem is that this type of assignment is not supported by most Medicare or Medicaid programs, as they only pay the provider of the service – without exception. Often, this is a stumbling block in the financing process.
Fortunately, there is a way to handle this situation.
Why is the assignment important?
The assignment is important to medical factors because it protects their collateral and ensures repayment. Private insurance companies are notified through a notice of assignment. This notice advises the insurance company that the receivables are pledged as collateral for financing and that payments should be remitted to a special account. But, as said before, Medicare and Medicaid will not remit your payment to the medical factor’s account.
However, a factor can still finance the invoices and protect their position by structuring operations in a specific way.
Solving the problem
You can solve this problem by keeping the bank account information as is but changing its operation model to a sweep account, sometimes referred to as a managed account. This type of account preserves your ownership but gives the factoring company full operational control. Since you own the account, Medicare/Medicaid can still remit your payments to it.
Since the factor has control, they can sweep the account on a regular basis to collect payments and settle invoices. When done correctly, this strategy allows the factor to secure their position and allows you to finance your medical receivables.
Not every medical factor is set up to handle government insurance payments. Therefore, ask about this issue early in the financing process. And, lastly, before signing on as a client, you should become familiar and comfortable with how they will handle your account. This point is critical if you want to have a productive relationship with the funding company.
Disclaimer: This article is not intended as legal or financial advice. You should consult a competent attorney if you have any questions.