by Alleon Capital on 05/14/12 at 10:42 pm
Terms In this short video, I will explain the major terms used in medical factoring and provide an example of a medical factoring transaction. Understanding the following terms will allow you to make the best financing choice for your practice.
Factoring A transaction in which a business sells its accounts receivable to a third party–called a “factor”–in return for immediate cash. In medical factoring, the accounts receivable are specifically those due from third party insurance carriers and government insurances.
Estimated Collectable Value (“ECV”):
Estimated Collectable Value (“ECV”) Most medical providers bill third party insurance carriers a higher amount than they will actually collect. A factor will determine, based on the provider’s historical collection rate and industry standards, the ECV a provider can expect to receive for the invoices billed.
Advance Rate Since a factor provides immediate cash for a receivable that will pay in the future, the factor will purchase the receivables at a discount. The amount the factor will pay for the receivable is known as the advance rate. In most medical factoring scenarios the advance rate is between 65% and 80% of ECV.
Payor The person or organization named in a bill or note who has to pay the holder. In medical factoring, the payors are third party insurance carriers.
Factor Fee Once the receivable is collected from the payor , the factor will recover his advance plus factor fee and return the rest to the medical provider. In most medical factoring cases, the factor fee is between 1.25% and 3%. This amount is determined on a 30 day basis.
Example Doctor has rendered services on a patient and billed the insurance carrier (“carrier”) $100 for the procedure. The doctor’s ECV is determined to be 90%, so the factor can expect to collect $90 on this claim from the carrier. The doctor will sell the receivable to the factor and the factor will advance the doctor $72 (80% of ECV).
Example (continued) Let’s assume the bill is paid two months from the purchase and the factor fee is 2% per month. Therefore, upon the $90 payment from the payor, the factor will keep $72 (the initial advance) plus $3.60 ((factor fee* ECV (4%*$90)) and return the remainder ($14.40) back to the provider.
For an application to see if Medical Factoring is right for your practice:
For an application to see if Medical Factoring is right for your practice Go to http://alleoncapital.com/medical-app Also, feel free to contact me directly at Benr@alleoncapital.com 201-340-6346 Or visit our blog http://medicalfinancingreceivables.co Ben Rutkevitz Alleon Capital Partners