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A complete guide to medical receivables factoring

How medical receivables factoring works 

  • A health care business sells its invoices or claims to a factoring company
  • The factoring company advances about 80 percent of the invoice or claim amount
  • The factoring company collects payment from insurance companies
  • Factoring company gives the borrower the remaining percentage, less fees

Cash flow woes are not uncommon in the health care industry. One way for health care organizations to improve cash flow is with a financial product called medical receivables factoring, also known as health care factoring.

Often, insurance companies process claims at a glacial pace, hampering health care organizations’ cash flow as they wait for the insurance companies to make payments. Similar to invoice factoring, medical receivables factoring can help improve cash flow while claims are being processed.

What is medical receivables factoring?

Medical receivables factoring is similar to invoice factoring, with slight differences. This is true for health care providers and other industries that accept third-party payments, such as patient claims paid by insurance companies.

Invoice factoring traditionally allows a business to sell its outstanding invoices to a finance company, known as a factor. Invoice factoring is not technically a loan. Rather than paying interest as would happen with a loan, the business pays the factor a fee in exchange for the cash advance on its invoices.

Two types of factoring fall under the medical receivables factoring umbrella. The first is for businesses within the health care industry that do not directly provide patient services, such as medical supply companies or medical transcription services. The second type is for health care providers that bill insurance companies or government insurance programs, such as Medicare and Medicaid.

The first type, businesses that don’t receive payments from third parties, can sell their invoices directly to a traditional invoice factor.

Health care providers that accept third-party payments may use the services of a medical factor. The provider sells the claims for insurance carriers, HMOs or Medicare and Medicaid. The factor pays the provider a percentage of the expected net collectable value of the claims — usually about 80 percent. At this point, it becomes the factor’s responsibility to collect the payments from the insurance companies.

Once the factor receives the payment from the insurance company, it releases the remaining percentage back to the health care provider, minus any factor fees.

Selecting medical receivables factor

When it comes time to select a medical receivables factor, what traits should you look for?

One of the first steps in selecting a company for any kind of financial service to compare factors and their fees. Once borrowers have a list of potential medical factors, there are a variety of criteria they should look at to pick the right one for them. Some criteria to consider includes:

  • Time. How quickly do you need funds available? Check to see how quickly the factor can set up an account for you, and how long it will take for them to advance you the money from your claims.
  • Fees. Which factor offers the lowest fees? Also check to see whether there are any additional fees besides the finance fee, such as a due diligence fee.
  • Medical specialty. Does the company specialize in medical receivables factoring? If you work for a health care provider that accepts third-party payments, you may want a factor that specializes in medical claims and invoices. Even if you work for a health care company that doesn’t accept third-party payments, you may still benefit from going with a company that has experience in the health care industry.