December 28th, 2008 | 
Author: 
Jason Robison asked:
The health-care industry has never been known for having excellent financial ratios, especially when it comes to accounts receivable turnover. Rightfully so as medical centers should be in the business of saving lives not collecting money. However slow receivables turnover is making it difficult for new medical firms to get off the ground. It’s difficult to save lives when you don’t have cash to buy new medical equipment or pay your employees.
Many new medical centers find it especially frustrating that they are experiencing cash flow problems. They are frustrated because business is booming and they think that this should mean cash flows are booming as well. The fact is that patients who can’t make payments don’t increase your cash flows one bit. In addition insurance agencies are often trying to wait as long as possible to make any payments to improve their own cash flow position. Studies in the early 2000′s showed that physician centers’ average collection time is over two months. For doctors this means that they treat patients today and won’t be paid for it for at least two months. Medical receivable factoring is a potential solution for Doctors that find their centers strapped for cash.
Here is an example of how factoring works for your average medical center. Physicians treat patients and the patients incur medical bills. These bills are paid either by the patient or more likely by the insurance company. The medical center can take these insurance claims to a third party financing company and sell them to the financing company at a discount. Note that this third party financing company is often referred to as a factor. The factor will pay the medical center for the receivable right away. This means that the medical clinic has cash that it normally wouldn’t have for another two months.
Medical factoring companies aren’t charities and charge a fee for buying the insurance claims. It’s probably best to think of this fee as buying a product at a discount. The factor will pay the medical clinic anywhere from two to five percent less than the face value of the receivable. The amount of discount that the factor decides to take depends largely on the amount of risk it is bearing. If the insurance company is known not to make payments, then it is likely the factor will charge a higher rate.
Average collection time for medical clinics doesn’t seem like it will be getting better any time soon. In fact, after the passage of the health bill by congress, it is likely that collection times will be even worse. Medical clinics need to find ways to improve their cash flows and factoring just might be the ticket.
Financing Accounts Receivable
The health-care industry has never been known for having excellent financial ratios, especially when it comes to accounts receivable turnover. Rightfully so as medical centers should be in the business of saving lives not collecting money. However slow receivables turnover is making it difficult for new medical firms to get off the ground. It’s difficult to save lives when you don’t have cash to buy new medical equipment or pay your employees.
Many new medical centers find it especially frustrating that they are experiencing cash flow problems. They are frustrated because business is booming and they think that this should mean cash flows are booming as well. The fact is that patients who can’t make payments don’t increase your cash flows one bit. In addition insurance agencies are often trying to wait as long as possible to make any payments to improve their own cash flow position. Studies in the early 2000′s showed that physician centers’ average collection time is over two months. For doctors this means that they treat patients today and won’t be paid for it for at least two months. Medical receivable factoring is a potential solution for Doctors that find their centers strapped for cash.
Here is an example of how factoring works for your average medical center. Physicians treat patients and the patients incur medical bills. These bills are paid either by the patient or more likely by the insurance company. The medical center can take these insurance claims to a third party financing company and sell them to the financing company at a discount. Note that this third party financing company is often referred to as a factor. The factor will pay the medical center for the receivable right away. This means that the medical clinic has cash that it normally wouldn’t have for another two months.
Medical factoring companies aren’t charities and charge a fee for buying the insurance claims. It’s probably best to think of this fee as buying a product at a discount. The factor will pay the medical clinic anywhere from two to five percent less than the face value of the receivable. The amount of discount that the factor decides to take depends largely on the amount of risk it is bearing. If the insurance company is known not to make payments, then it is likely the factor will charge a higher rate.
Average collection time for medical clinics doesn’t seem like it will be getting better any time soon. In fact, after the passage of the health bill by congress, it is likely that collection times will be even worse. Medical clinics need to find ways to improve their cash flows and factoring just might be the ticket.
Financing Accounts Receivable
About Wade Henderson
Wade Henderson: Domestic and International Business Finance since 1995 specializing in challenge situations. "We prefer to find a way to get your loan done as opposed to finding a reason to turn it down.” Connect with me on Google+
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