Using Medical Factoring to Finance a Hospital

Managing cash flow is usually a challenge for small and midsize hospitals. One of their main sources of revenue are claim payments from medical insurance companies, who often pay slowly. Depending on the negotiated terms, claims can take from 30 to 180 days to pay. Slow payments have an obvious and negative impact on cash flow.

On the other hand, most hospitals have a number of regular expenses such as facilities, payroll, and equipment. With a combination of slow revenues and ongoing expenses, it’s easy to understand how a hospital can have cash flow problems. Few companies have the financial resources to wait more than 60 days for payments – let alone 180 days. This delay puts hospitals in a difficult financial position.

Financing claims improves cash flow

One way to improve your cash flow is to speed up the payment of insurance claims. Unfortunately, negotiating faster payments with insurance companies is nearly impossible.

You can accomplish similar results by financing your insurance claims using medical receivables factoring. Factoring provides the hospital with immediate funds using your claims as collateral. This solution improves cash flow, allowing you to pay for business expenses and investments.

When used correctly, a factoring plan can provide predictable cash flow. This approach minimizes financial problems, enabling you to manage the business more effectively.

Factoring hospital receivables

The premise behind factoring is fairly straightforward. The hospital works with a medical factoring company who funds their insurance claim by advancing a portion of the claim. The advance rate varies based on individual circumstances but averages 75% of the net payable claim. Once the claims are paid, the medical factor settles the account and rebates the remaining 25%, less the finance fee.

The finance fee is usually determined by the size of your financing needs, the quality of your claims, the time it takes to get claims paid, and the effectiveness of your medical collections process. Most factors offer volume discounts; therefore, larger accounts can negotiate lower fees.

Receivables factoring can be used to fund most types of third-party medical insurance claims – including most private medical insurance plans as well as Medicare and Medicaid. When used correctly, a factoring plan can provide the hospital with predictable cash flow.

Factoring over-advances are key

One key to implementing a successful medical factoring plan in a hospital setting is to work with a factor that is comfortable providing over-advances. As its name implies, an over-advance is an advance that exceeds the normal advance rate.

In our experience, some hospitals can still have problems after implementing a receivables factoring plan. This dynamic is due to the fact that cash flow can be extremely tight during certain times of the year.

The only way around this problem is to get an over-advance. Most medical factoring companies that have experience working with hospitals are familiar with this solution. Over-advances can be provided only on a case-by-case basis after a careful review of the circumstances.

The due diligence process

Given the size of the facility and the complexity of operations, the due diligence process to establish an account can take a couple of weeks. The medical factor has to send a team to the site to review the operations – including financial statements, procedures, and the collections process.

The cost for this review covers the out-of-pocket expenses of the factor. The cost is determined by the size of the account and the complexity of the situation. If you are looking for a factoring company, consider reading “How to Select a Factoring Company“.

Is your hospital a candidate for accounts receivable factoring?

The hospital may benefit from implementing a receivables factoring plan if it has cash flow problems that are due, primarily, to slow-paying claims. Unlike most lines of credit, medical factoring can be used by hospitals that have financial problems such as:

  • Cash flow problems
  • Tax problems
  • Losses
  • Restructuring issues
  • A bankruptcy in process

Need medical factoring?

We are a leading provider of medical factoring and can provide competitive terms to your hospital. For information, fill out this form or call us toll-free at (877) 300 3258.