The medical industry is full of complicated financial considerations and processes. The sector can be highly profitable for successful businesses, but reaching that level is often more challenging than it seems initially. Medical factoring can help.
Medical organizations often face financial difficulties despite the high demand for their services. At least 29 hospitals filed for bankruptcy in 2020 alone, and many others struggle to stay afloat in this increasingly competitive market. This issue is complex and has multiple influencing factors, but the lengthy, delay-prone billing process for vendors and providers is significant.
Thankfully, these issues aren’t unavoidable. Healthcare factoring can open more opportunities and offer financial security for otherwise struggling medical companies.
Table of Contents
What Is Medical Factoring?
Factoring is a process where businesses sell their accounts receivable to a third party. Typically, that means accepting a lower rate for the bill in exchange for immediate payment, which is often preferable in many healthcare settings. This process is not exclusive to the medical industry but is common, mostly due to its long billing cycles and unique financial needs.
Healthcare invoice terms typically fall around 30 days, leaving a considerable gap between when businesses provide services and when they receive payment. To add to the issue, many medical bills are late. About 100 million Americans have medical debt, many of whom don’t expect to pay it off.
These long, often late, billing cycles are particularly difficult given the industry’s high demands. Providers and vendors must pay third parties, staff, bills, and legal fees, all of which may require payment before these companies settle their accounts receivable. Factoring eases that burden by providing an advance.
Two main types of healthcare businesses benefit from factoring: vendors and providers. Vendors sell medical goods, equipment, and services, while providers, such as surgeons and dentists, perform actual medical work. These groups bill differently but face similar challenges, and both often need factoring.
How Does Medical Factoring Work?
To understand how factoring benefits vendors and providers, it helps to first know how medical factoring works. The process begins with finding a factoring company. The potential partner will review them before agreeing to take on their accounts receivable.
This review process entails examining bills to ensure they’re correct and examining clients’ credit histories. That may involve credit checks, as factors don’t want to take on too much risk, especially considering how common bill delinquency is in the industry.
After approval, the factor will buy the bill from the seller, in this case, either a medical provider or vendor. They typically offer around 80% of the invoice at first, but some factors offer higher upfront payments. Once the factor receives compensation from the client, they’ll contact the seller and pay the remaining balance, minus a fee for their services.
Because the factoring company buys the bill, they also typically take on the responsibility of debt collection. Considering that more than half of the accounts in collections on people’s credit reports are medical bills, that can be a relief for vendors and providers.
Recourse vs. Non-Recourse Factoring
Businesses should know about a couple of different kinds of medical factoring. The first distinction is between recourse and non-recourse factoring. Non-recourse deals are more common in the medical industry, but recourse factoring is still around in the sector, so it’s worth learning about.
A recourse agreement states that the seller will buy back any remaining balance if the factor cannot collect the account. This recourse transfers the risk of nonpayment back to the seller, offering the factor some more protection but making it less appealing to most sellers. Nonpayment and late payment are such common issues in the medical industry, so these agreements are far less common.
A non-recourse agreement, by contrast, leaves the risk of nonpayment with the factor. If the client doesn’t settle the account or the factoring company can’t reach them, it stays with the factor. That company can sell the debt to a third-party collections service or pursue legal action if it wants, but it doesn’t have the right to transfer it back to the original seller.
Purchase vs. Advance vs. Reserve Factoring
Factoring deals can also vary by how the factoring company pays for the account. The three main types of this distinction are purchase, advance and reserve factoring.
The most straightforward of these is a purchase agreement. In this type of deal, the factor buys the invoice outright, either at a discount of the bill’s original price or for an agreed-upon flat fee. The advantage is that the transaction is easy to understand, fast, and requires minimal paperwork. Seeing as how healthcare workers spend 57.5% of their time on repetitive tasks, that ease of use can result in considerable time savings.
An advance agreement is a more common type of health care factoring deal. These involve the factor of paying most of the bill upfront, then paying the rest, minus a fee, after receiving full payment from the client. How that fee works can also vary.
In many cases, the fee is a flat rate, regardless of the account’s size. Other arrangements use a tiered system where the price varies depending on the amount owed, how many invoices the factor is taking on or how long it took to collect the debt. Some others adjust the fee according to the prime interest rate.
Some medical factoring companies use a process called reserve factoring. In these agreements, the factor holds around 10%-15% of the seller’s credit line in a reserve account. They can then use these funds if the client fails to pay on time.
Health Care Factoring vs. Financing
Some companies offer medical invoice financing, which is similar to factoring but has some important differences. Most notably, it involves borrowing money against an invoice, whereas the vendor or provider sells the bill outright in factoring.
Like factoring, financing lets medical companies receive up to 90% of an invoice’s worth upfront. This provides similar benefits in terms of cash flow and financial security. However, this is a loan, not a sale. Consequently, the provider or vendor will have to pay it back with interest.
Medical invoice financing is sometimes a faster process, as financers can often determine creditworthiness faster and without a credit check. Sometimes, the lender will also give the vendor or provider 100% of the invoice’s value, which most factoring agreements don’t. However, it comes with some unique disadvantages, too.
Unlike factoring, the borrower is still responsible for collecting debts in a financing agreement. The high rate of late payments in the medical industry can be risky for some businesses. It may also be harder to qualify for financing compared to factoring.
How Does Medical Factoring Benefit Vendors and Providers?
Knowing what medical factoring is is just the first step in the decision-making process. Vendors and providers must also know what tangible benefits it can offer them before seeking these agreements. Here’s a look at some of the most significant.
More Immediate Cash Flow
The most obvious advantage of healthcare factoring is that it provides more immediate cash flow. Even without delinquency, some vendors and providers can take upwards of a month to receive payment for their services. That can make it difficult to form budgets or pay bills, especially for smaller businesses with less client volume.
With a factoring agreement, companies can receive payments within three days despite invoice terms lasting longer than 30. This immediacy minimizes the challenges of late payments from patients or slow insurance companies. The vendor or provider can then pay their own bills faster or invest in new opportunities without an extended waiting period.
This cash flow is particularly helpful as a safety net against unexpected expenses. Vendors and providers can face sudden and substantial costs from broken equipment, patient issues or other unforeseen challenges. Faster cash flow lets them resolve these issues faster, minimizing disruption and ensuring a speedier recovery.
Consistent, reliable cash flow is important for any industry, but a sector as unpredictable as health care can benefit even more from it. Smaller medical companies may find it challenging to grow and compete without the immediacy of factoring.
Improved Flexibility and Scalability
A secondary benefit of improved cash flow is that vendors and providers can become more adaptable. Adaptability is critical in today’s fast-moving industry, but slow payments can make it difficult to adjust quickly. More money upfront makes it easier to restructure business practices or implement new equipment.
Recent technology trends and the challenges they bring make this scalability even more important. Digital tools like electronic health records (EHRs), cloud computing, artificial intelligence (AI), and the necessary resources to secure them are becoming increasingly crucial to healthcare success. However, tech adoption remains slow in the industry, with cost being the leading barrier for most businesses.
Many of these digital resources offer savings in the long run, but their upfront costs pose an issue. Consequently, freeing up more cash earlier in the billing process lets providers and vendors overcome this barrier and implement these tools. In that context, factoring becomes an important part of embracing digitization.
The COVID-19 pandemic has revealed how quickly the industry’s needs can shift. Medical businesses need fast, accessible capital to adapt rapidly. Factoring provides that, letting these companies become more resilient, even in the face of unexpected disruptions.
Minimized Disruption From Regulatory Changes
Similarly, healthcare factoring can help vendors and providers meet regulatory changes with minimal disruption. The medical sector is understandably one of the most highly regulated, and these regulations are prone to change. Medical businesses often face changing laws as new technologies spur concerns and political landscapes shift, which can pose financial challenges.
Many medical reforms focus on billing practices, as 31% of adults worldwide cite high costs as health care’s largest issue. Regulations over how vendors and providers can charge their clients shift, causing invoice periods to extend or payment models to change. These changes, in turn, can worsen businesses’ current payment issues or require them to rethink their budgeting strategies.
Factoring helps offset the impact of these regulatory changes by ensuring medical companies have more upfront cash. Larger reserves help businesses adapt easier. The factoring model also ensures that longer payment periods don’t necessarily mean longer wait times for medical facilities to receive their due.
These regulatory changes can be important steps forward for healthcare accessibility, but medical organizations must be able to adapt to them to maintain a high standard of care. Factoring agreements enable that flexibility and security.
Debt Prevention
Another advantage of medical factoring, especially compared to other cash advance models, is that it helps minimize debts. Financing and similar solutions can provide fast cash flow but require businesses to go into debt, at least periodically. That may be acceptable for some organizations, particularly larger ones with more financial security, but it’s not ideal for others.
A factoring agreement buys invoices from the seller instead of loaning money, so it provides debt-free upfront cash. Consequently, vendors and providers don’t have to worry about using a credit line to afford needed upgrades or pay for unexpected expenses. Avoiding debt will help further simplify these businesses’ accounting and offer more financial freedom.
Revenues are often relatively high, but so are the industry’s expenses. CVS Health, one of the largest healthcare companies in the nation, has an operating margin of just 5%, spending $255 billion on operating expenses. These high ongoing costs can make it difficult to avoid any debt, so preventing it wherever possible is a sound strategy.
Factoring won’t eliminate a medical business’s debt, but it does help minimize it. Vendors and providers can then enjoy more flexibility in other areas where they may need to take out loans.
Boosted Creditworthiness
Similarly, relying on factoring companies rather than lenders can help boost a business’s creditworthiness. Some amount of debt is often unavoidable for growing medical companies, thanks to their high operating expenses. However, taking out too much can hinder these facilities’ financial positions, making it difficult to access more competitive loans for the things they need.
The first way factoring improves creditworthiness is through debt prevention. Some open lines of credit can help showcase a company’s financial strength, but too many may signal risk to potential lenders. Minimizing these by factoring instead of financing helps vendors and providers avoid that situation.
Factoring can further improve medical businesses’ positions by giving them more liquid cash flow. Many agencies consider this one of the most critical aspects of credit ratings, so boosting incoming cash can, in turn, make businesses appear like a less risky investment. They may then qualify for more loans or be able to access better interest rates.
This improved creditworthiness will open even more opportunities for vendors and providers. They’ll be able to afford larger upgrades on better terms, leading to quicker returns on investment (ROI).
Security Amid Economic Challenges
Healthcare factoring can also provide needed security in the face of an economic downturn. Medical businesses offer essential products and services but are not immune to macroeconomic movements. These organizations, especially providers, are more recession-proof than other industries, but medical spending does tend to decline amid broader economic issues.
Nearly 32% of American adults skipped some kind of medical care in 2020 because of costs. Recessions and other widespread economic challenges could make that spending dip more likely. Consequently, vendors and providers need cash reserves to carry them through a downturn.
Factoring doesn’t give medical businesses more clients or make those customers pay more, but it does offer more liquidity. Declining healthcare spending is less impactful when these companies can receive the money they earn faster. Shorter invoice terms also make it easier to plan budgets, which may have to adjust amid a declining economy.
This security can benefit vendors and providers outside of a recession, too. Some smaller businesses may need help to stay afloat amid rising competition or periods of low patient volumes. Cash advances from factoring companies can help offset the impact of those losses.
Legal Safety
Factoring can provide a similar safety net for legal challenges. Lawsuits are common in the medical sector, with the industry facing more than 11,000 medical malpractice reports annually. Factoring agreements won’t prevent these lawsuits, but they do provide an economic cushion to help soften their blow.
Even if a medical business never has to pay out in a suit, the healthcare legal landscape can be expensive. Malpractice insurance and similar coverage represent considerable ongoing costs, even though they’re less costly than a lawsuit without them. Improving cash flow through factoring can help account for these expenses.
Given these risks, vendors and providers should always have a cash safety cushion to protect them from unexpected legal costs. The upfront payment businesses get from factoring can provide that. Factoring also offers this cash reserve without the need to go into debt, which could further complicate companies’ finances.
Some factoring agreements let companies choose their payout schedules, too. This can be useful if vendors or providers see a temporary reputational drop after a case. Steady cash flow from these agreements will help compensate for less frequent business.
Considerations for Health Care Factoring
Medical factoring has many advantages, but businesses should still approach it carefully. Not every factoring company offers the same benefits, and the optimal path forward can vary between specific situations. With that in mind, here are some things to ponder when considering a factoring agreement.
Medicaid-related invoices are one of the biggest challenges in healthcare factoring. The Social Security Act has an anti-assignment provision that forbids assigning government-reimbursed claims to third parties. Consequently, providers can’t directly sell Medicaid- or Medicare-covered bills to a factoring company. There are ways around this, most often through a separately managed account, but it makes the process more complicated.
Federally reimbursed invoices also introduce fraud considerations. If the factor’s fee in these agreements isn’t commercially reasonable or within the range of similar arrangements, it could qualify as a kickback. That may violate the Anti-Kickback Statute and Physician Self-Referral Law under the Stark Law.
On a less extreme note, factoring may carry higher fees than similar cash advance arrangements like financing. Vendors and providers should weigh their options to see which offers them the best deal in each situation.
How to Evaluate Medical Factoring Companies
Vendors or providers that decide factoring is right for them should weigh different medical factoring companies. Factoring is a big business, covering multiple types of arrangements that may be more or less ideal for various medical facilities. Consequently, the best factoring company for one operation may not necessarily be the best for another.
Like medical providers and vendors themselves, medical factoring companies often have specialties. Some prefer to work with specific kinds of medical businesses or serve companies of a certain size. Providers and vendors should look for factors that target and have experience with their size or specialty to find the best arrangements.
Given this industry’s high risk of legal consequences, businesses should also look into factors’ backgrounds. It’s best to avoid factoring companies with a history of litigation or whose clients have encountered frequent litigation.
Finally, vendors and providers should look at the specifics of the arrangement itself. Consider how the reimbursement works, how fast the payment period is if it’s a recourse or non-recourse deal, and if the company has minimum volumes. Businesses should compare this information to their specific needs and operations to find the best deal. It’s also best to have a lawyer review these contracts before signing them.
Medical Factoring Can Expand Businesses’ Opportunities
Vendors and providers that do their research and find the ideal factoring arrangement can see considerable benefits. These deals can improve cash flow, minimize the impact of regulatory or economic shifts, enable more scalability and boost a business’s financial standing.
Like any arrangement in this industry, medical factoring deals require close attention and consideration. However, if vendors and providers understand the risks and benefits and know what to look for, factoring can be a crucial service.
