Common Misconception that Medical Factoring is Expensive

by on 10/05/12 at 4:03 pm

Debunking Medical Factoring Myths

There is a common belief among medical providers that medical factoring, the financing method of selling accounts receivable at a discount is an expensive alternative to traditional bank loans. It is assumed that only those with bad credit or those who otherwise cannot qualify for a traditional credit line at their local bank should consider factoring to solve their cash flow needs.

Let’s first give an example of how a medical factoring transaction works:

—  Provider has rendered services to a patient and billed the insurance carrier (“Carrier”) $110.00 for the procedure.

—  The provider’s Net Collectable Value (“NCV”), which is based on historical collections and the fee schedule is determined to be $100.00.

—  Factor fee is agreed upon to be 2% of NCV/month.

—  Factor will advance the provider $80 (80% of NCV).

—  Let’s assume the invoice is paid two months from the advance date.  Here’s what the cash distribution will look like:

—  Payment from the Carrier:                           $100.00

—  Factor recoups its initial advance:             $80.00

—  Factor receives its factor fee:                     $4.00 (2%*2*$100.00)

—  Provider receives the remainder:             $16.00

 

—  In summary, provider receives $80.00 immediately, plus another $16.00 when the invoice is paid => $96.00

 

Upon learning the structure of factoring transactions, most providers then make the assumption that their cost is 2% per month. They mistakenly view this as a monthly interest rate and automatically multiply the monthly factoring fee by 12 months to get an annual cost of 24%.

So they think that if they factor $1,000,000 a year they will end up paying the factor, $240,000 in interest. This is the biggest misconception about factoring!

The way it really works is that if the provider’s claims get paid within one month and they factor $1,000,000 worth of claims per year, their total cost with be $20,000 not $240,000. The reason why is because the factor fee is not an interest rate.

It does not get paid on a monthly basis. It only gets paid when the claim is paid by the insurance company.

This is a very important concept to understand and a good medical factoring company will advise you that what’s important in factoring is figuring out whether your margins can afford factoring costs. As long as your practice can afford a 2% fee per claim or 4% if the claim takes two months to pay, then you can benefit from getting an advance on your claim immediately, instead of waiting for the insurance company to pay.

Factoring helps with cash flow needs as well as supplies a steady, consistent and predictable cash flow that allows a practice to plan and budget accordingly. Factoring also allows for medical practices to grow, knowing they will get paid immediately after submitting claims instead of waiting months for remuneration. This is especially important for practices that have high costs associated with acquiring new patients.

 

Ben Rutkevitz is the Managing Director of Alleon Capital Partners (“ACP”). ACP is a specialty finance company focusing on providing capital solutions to the medical industry. Its target is small to mid-size medical providers that bill Medicaid/Medicare, HMOs, Commercial Medical, No-Fault, Worker’s Compensation or await payments from Personal Injury Settlements.

If you would like a free consultation to see if medical factoring is right for your practice contact Ben Rutkevitz at 201-340-6346or or email him at benr@alleoncapital.com. You can also visit Alleon Capital Partners at www.alleoncapital.com or at their blog, http://medicalfinancingreceivables.co

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