[P840]Purpose Of Cash Flow

Factoring medical receivables has become a popular means of acquiring capital. It wasn't too many years ago when the hot trend in the physician world was the purchase of medical practices by hospitals. The theory was that not only would the hospitals benefit by an influx of referrals, the physicians would not have the headache of managing their practice and therefore earn more and work less.

Unfortunately, this rosy scenario has not always worked out and, as a result, many doctors are terminating their contracts with the hospitals. This has forced the physicians to re-establish their practices. For most doctors, maintaining their customer base isn't a problem, as most patients will follow them back into private practice. The main issue is practice management in general, and financing in particular.

Although the physician may have no trouble getting financing for capital expenditures, a more ongoing problem is how to pay expenses and overhead incurred during the 60 to 90 days it takes to get paid from third party payers. As doctors and other providers are getting financially squeezed because of reduced Medicare reimbursements and higher costs, the need for funding becomes greater. Even the most efficiently run practices need short term working capital as their businesses grow, and as a result of this need, healthcare financing companies have sprung up to provide medical receivables funding.

Even though the largest asset of most providers is their accounts receivable, most banks won't lend money on that asset. Loan officers often lack the specialized knowledge of the healthcare claim billing and collection process. Because there can be a significant difference between the expected amount to be paid versus the face amount of the billings, banks are leery of using it as collateral. In a medical factoring situation, the funding company purchases the outstanding receivables of the practice, thereby assuming an ownership position in the receivables. Because the ownership of the receivable has changed, the practice also passes along the credit risk to the funding source.

ADVANTAGES OF RECEIVABLES FUNDING

* There is no monthly debt service because the funding is not a loan.
* It is an off-balance sheet transaction since the client is selling an asset.
* The client can receive fresh cash weekly, thus providing a manageable flow of funds.
* Because the only asset that is encumbered is the receivables, the healthcare firm can pursue other types of financing concurrent to this program.
* Factor fees tend to be much less than paying a billing company.
* No personal guarantees are required. The factoring company is more interested in the credit of the payor.

THE FUNDING PROCESS

1. The provider completes a client application and submits it to the funding source.
2. The funding source sends out a Letter of Intent, which specifies what can be done for the healthcare provider.
3. After receipt of the signed Letter of Intent, the funding source draws up a Purchase and Sales Contract for the client. This contract specifies the fees to be charged and the advance rate to the provider. The provider must pay a due diligence fee. This fee helps the funding source defray costs of researching and analyzing the practice's billing methods and procedures and to verify that the net collectible billing is accurately reflected on the firm's books.
4. The funding source performs final due diligence, and provides reports to the client's management as to the integrity of the billing and collection system.
5. The factor advances 75%-85% of the net collectible receivables to the client's bank account.
6. When the invoice is paid to the factor, the remaining amount (invoice total less the advance less the factor fee) is wired to the customer's account.

The factoring of medical receivables is a relatively new industry, but is also rapidly growing. It can provide much-needed working capital to providers for meeting expenses, making investments, growing the practice, and taking advantage of early payment discounts.