As congress puts the squeeze down on the health care industry, interesting ideas have arisen by innovative financiers at health centers across the nation. One of the more intriguing options is medical receivable factoring. The idea of factoring accounts receivable seems enticing, but is it a long-term option?
The basic idea of factoring is very appealing. A medical clinic can take its account receivables from insurance companies and patients and get cash for them right away. The receivables usually take months to collect on and factors are eager to buy them up today.
A medical center takes its insurance claims and receivables and sells them to a third party factor. The factor gives the medical center around 70 percent of the face value of the receivable right away. This means that the center now has cash to pay employees and buy new equipment. The factor then essentially charges around a three percent interest rate per month. I say essentially because some factors don’t want to call it an interest rate because they bought the receivable. You don’t pay interest on something you bought. This has caused a lot of accounting hysteria, but we’ll skip that for now.
After the receivable is sold, it is up to the factor to collect the payments in most situations. Once the factor collects the payment it remits the remaining 30 percent to the medical center minus the interest charge.
The cost is the three percent per month (note that this is just an average). This is an annual interest charge of 36%. That is about as high an interest rate as you can get and it doesn’t seem quite fair considering the factor is basically giving a collateral-backed loan. Collateral-backed loans should be less expensive than traditional loans, not more expensive.
To medical factoring companies’ defense, they are providing more than a loan, in many cases they are providing a collection service as well. Most medical firms know that collections can be a nightmare so that might be why some medical centers are willing to pay the increased cost.
The fact that most factoring companies advertise that “no long term contract is needed” should give you a pretty good idea that this isn’t meant to be a long term solution. Factoring can be a great way to get some quick cash, but it’s a costly one.