Medical Factoring for Healthcare Receivables: Average Rates, Benefits, and Qualifications
Healthcare providers face significant challenges when it comes to receiving payment for medical services in a timely manner. On average, it takes anywhere from 30 to 120 days to receive payment on medical insurance claims. This delay affects providers regardless of their size, though small and new providers, who are more susceptible to cash flow problems, typically feel the sting more severely than established clinics do. Instead of waiting months to receive payment for your services, medical invoice factoring advances the majority of the payment to the provider, with the remainder paid once the insurance company makes payment (minus a fee).
How Does Medical Factoring Work?
In essence, transactions involve selling the claim to the medical factoring company, for which the provider pays a small fee. You submit an approved claim and the medical factoring company advances a percentage of the claim amount. This amount varies, but it typically maxes out at around 80 percent of the amount owed. When the insurer pays the claim, the financial company pays the remaining percentage, minus its finance fee. The fee varies according to the factoring company and the rate plan you choose.
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What Are the Rates for Medical Invoice Factoring?
There are three fee structures for invoice factoring. Tiered factoring and flat fees are the more common options, though you may also see companies offering a fee structure called prime plus.
Tiered factoring fees charge by the number of days that payment is outstanding. The most common accrual method is monthly, though you also see daily and weekly schedules. Occasionally, you find companies that calculate in 10- or 15-day increments. You may also find a company that accrues monthly but calculates that fee daily or weekly. Daily and weekly rates offer greater opportunity to save, since payment at the beginning of a tier means you aren't paying for additional time. For example, if payment occurs at the beginning of March, a monthly structure means you pay for the entire 31 days of the month. Tiered factoring is the most common fee structure.
Flat Fees are easiest to understand; you simply pay a percentage of the invoice. The amount of time it takes for the insurer to make payment does not enter the equation. Flat fees are the second most common fee structure.
Prime Plus fees are not as common. This rate depends on the interest rate financial institutions charge customers who have the best credit, which varies, plus another small percentage, which also varies. As of July 2017, the U.S. prime rate was 4.25 percent. The "plus" part of prime plus varies by provider, but between 3 and 4 percent is common. If your finance company charges 3.5 percent, your prime plus rate would be 7.75 percent. When the prime rate changes, your rate changes as well.
What Are Non-Recourse and Recourse Factoring?
One risk in factoring is if an invoice goes unpaid. If the healthcare provider assumes this risk, it is called recourse factoring. If the finance company assumes this risk, it is called non-recourse factoring.
In recourse factoring, the entity selling the invoice (the healthcare provider) buys back uncollected invoices. Healthcare providers typically prefer non-recourse factoring, since they bear zero risk if an account is never paid.
The Benefits of Factoring
No matter how efficient your administrator is, he or she has no control over the bureaucracy of medical insurance companies. You may even increase the efficiency of your administrative team, since your staff no longer needs to spend valuable work time chasing payment. That saved time can be dedicated to improving patient care and completing other administrative tasks that often take a backseat to tracking down payment.
Increasing cash flow also allows you to grow or expand your practice more quickly. It helps with budgeting and lets you allocate revenues according to priorities, such as marketing initiatives to increase revenue and technology upgrades to improve efficiency.
Medical Factoring Qualifications
Qualifying for medical invoice factoring is typically easier than qualifying for traditional credit. Requirements include:
- Background check: Many factors require background checks to determine criminal history.
- Commercial or government clients: Factors may not buy invoices from retailers.
- No liens or encumbrances: You cannot finance invoices already pledged to another financial institution. Accounts receivables pledged as collateral do not qualify for factoring.
- No open bankruptcy: Many factors refuse contracts with providers undergoing Chapter 11 or personal bankruptcy.
- Operate a business: Most factors require a formal corporate structure, such as a corporation or limited liability company.
- Profit margins: This requirement varies, but in general you need a 10 to 15 percent profit margin.
- Tax liens: If you owe taxes, you must be on a payment plan. Also, the taxing authority (typically the IRS) must be willing to subordinate its position to the factor's.
- Your client's credit-worthiness: Factors worry more about the credit rating of who owes you than your own credit, since payment depends on your customers paying you.