A new emerging niche in the factoring industry is medical claims factoring. It is a little bit different than traditional factoring in a few main respects. The first main difference is how the receivable is valued by the factoring company. The second main difference is the dependence on technology in the day to day factoring operations. The overall concept of advancing a percentage of the invoice amount immediately and then waiting to get paid is the same. The concept of charging a fee based on the days the receivable is outstanding is the same as well. Let’s take a look at the main differences in a little bit more depth.

    A medical claim receivable to a medical practice or provider is almost never paid in full. Another way of saying that is that the payment for a particular claim is usually less than the amount that claim was billed for. This happens due to a variety of reasons. A big reason this happens is just the plain old inefficiency of our medical system. The third party payors, mainly insurance companies and government health entities, kick back claims to the providers for a number of reasons one of the biggest being billing and coding errors. Medical claims billing is a very specific skill and when done incorrectly it will result in a delay of payment. Third party insurance payors use the time delay in the time it takes them to pay out for a claim to enhance their cashflow and finance their business. When they do pay the claim they often pay an amount they determine to be owed and not the claim amount. This has lead to a system where a provider or practice is forced to intentionally over bill in order to arrive at getting a fair payment for their services.

    As you can see, if each payment is different than the claim amount and sometimes the difference is dramatic it would be very difficult to arrive at an amount you could expect to be paid in order to discount the claim. For a long time this was the problem most factoring companies had. Today factoring companies have technology and talent available to them to use the historical billing and collection rates to set specific advance rates for each payor. This allows them to arrive at a blended advance rate and judge their collateral on a statistical and mathematical basis. It also helps the practice to understand each day where they stand on cashflow and identify billing and claim problems resulting in more efficiency to the practice. The savings from the practice being able to track and tweak their daily cashflow usually is more than enough to make the initial set up costs and fees of factoring.

    Much of the processing and calculating work is done by computers and IT specialists. A connection is set up between the finance company’s computers and the medical practice’s information system. Once a day, usually after business hours, the medical practice passes the billings and collections for the day to the funding company electronically. The funding company’s system then crunches the payments, new billings and ineligible claims based on preset rules and comes up with an advance amount that is then wired to the practice the following day.

    In order for the funding company to control their collateral (the payments for the claims) a lock box is usually set up by the practice and in the name of the practice that is exclusively controlled by the medical factoring company. This allows the funding company to receive the payments from all third party payors but still have the practice properly apply the remittance advice in their accounting system. This avoids another common problem that arises when the third party payors are government entities. Generally, the payments from the government to the provider are not assignable to a third party. By having the payments go to the provider’s lockbox this satisfies the requirement of having the payments made directly to the provider but still satisfies the factoring company’s need to control the payments.

    What types of practices or providers are good candidates for medical factoring? Durable medical equipment providers (DMEs), all types of general and specialist medical practices are great candidates. The best candidates are well run organized operations that are using industry standard billing and accounting software. These types of deals are a lot more complex than traditional factoring deals and take a little bit longer lead time to set up with a factoring company.
 
If you own or are starting a medical practice or DME and have questions on how medical factoring of your claims can help you please get in touch with us today!