Why medical receivables financing is its own product

A commercial invoice is a stated obligation. A medical claim is a request. That is the whole reason two products exist.

The valuation problem

Suppose a factor buys a 10,000 freight invoice: the amount owed is 10,000. Now suppose a funder looks at a 10,000 medical charge. What actually arrives depends on the payer's contracted allowable, the patient's remaining deductible and co-insurance, whether the claim codes cleanly, whether it is denied and appealed, and whether any of it becomes bad debt.

So the funder does not lend against the charge. It builds a net collectible value from your own history: this payer, this code family, this practice, this denial rate. Two practices with identical gross receivables can therefore support very different facilities, and the one with better documented collections wins.

Net collectible value, worked

Illustrative only — $840,000 of gross charges in a month.

Contractual adjustments take 52%, leaving $403,200 of allowed amounts. Denials and write-offs that survive appeal remove a further 7%, leaving $374,976. Of that, 18% is patient responsibility — deductible and co-insurance — which is $67,496, and historically you collect 62% of patient balances, so $41,847 arrives and $25,649 does not.

Net collectible value: $349,328, which is 41.6% of gross charges.

Apply an 80% advance rate to the net collectible value and availability is $279,462 — 33.3% of the charges you actually billed.

A practice that hears "80% advance rate" and budgets 80% of $840,000, or $672,000, is out by a factor of 2.4. Nobody misled them. The advance rate is applied to a different number from the one in their head, and the gap between those two numbers is the whole product.

Before taking any quote seriously, ask which percentages the funder is using at each of those four steps, and whether they came from your data or from a sector average.

The assignment problem

Federal programme rules restrict assignment of Medicare and Medicaid payments to third parties, with limited exceptions. A lender generally cannot simply have those payments sent to itself the way a factor redirects a commercial invoice.

The market's answer is structural rather than a workaround of the rule: payments continue to be made to the provider in accordance with programme requirements, into an account the provider owns, and a separate deposit account control agreement gives the lender rights over that account after the funds arrive. Whether a particular arrangement is compliant depends on the programme, on how the account and the sweep are documented, and in Medicaid's case on the state plan. It varies by state and the rules are revised. Have healthcare counsel review the control documents before signing; this is not a place to rely on a funder's assurance.

The monitoring problem

Because the asset is an estimate, the funder has to watch it continuously. Expect:

• A borrowing base recalculated frequently, often weekly, from your practice management system
• Aging buckets with claims dropping out of eligibility past a set age
• Payer concentration limits
• Dilution testing, which measures the gap between what was billed and what was collected
• Reporting on denials, appeals and write-offs
• A lockbox or controlled deposit account

That reporting burden is real work for a small practice, and it is worth asking who inside your office will actually produce it before you sign.

The credentialling problem

Your right to bill a payer at all depends on enrolment and credentialling, which is provider-specific and payer-specific. A lapse, a new provider not yet credentialled, or a payer contract termination changes your collectible ledger without changing a single clinical fact. Funders that know the trade ask about this. Funders that do not will discover it during a shortfall.

What to have ready

• Aged A/R by payer showing gross charges, expected allowables and net
• Payer mix as a percentage of collections
• Twelve months of monthly collections
• Denial rate and top denial reasons
• Credentialling status by provider and payer
• Your practice management and clearinghouse reporting capability
• Any existing liens on receivables

Where your own numbers come from

Every input in that calculation is derivable from your own system, and a funder that builds the facility from your figures rather than from book assumptions will produce a facility that behaves the way it was described.

• Contractual adjustment rate. Allowed amounts divided by gross charges, by payer, across twelve months.
• Net collection rate. Payments divided by allowed amounts, over the same period, with enough lag that the claims have actually resolved.
• Denial rate and overturn rate. Claims denied on first submission, and the share recovered on appeal. The second figure matters more than the first and is the one most practices cannot produce.
• Patient responsibility share and its collection rate. Both have moved for most practices over the past decade, and a stale assumption here overstates availability more than any other input.
• Days to payment by payer. Use the median rather than the mean, because the mean hides the long tail that decides which claims fall out of your ageing.

Produce those five before the first conversation. A practice that arrives with them gets underwritten on its own record, which is the only circumstance in which the facility comes out the right size — and it is also the fastest way to tell whether the funder across the table has financed medical receivables before or is about to learn on your file.

What to ask, and what to refuse

Ask how net collectible value is calculated and whether you can see the assumptions. Ask which payer categories are excluded outright — self-pay and workers' compensation frequently are. Ask what happens to availability if a major payer contract ends. Ask who instructs the lockbox and under what circumstances. Ask what the reporting obligations are and at what frequency.

Refuse an advance calculated on gross charges. Refuse an arrangement that purports to assign government programme payments directly without counsel's sign-off. Refuse to sign a deposit account control agreement without understanding what triggers the lender taking control of the account, because that trigger is the practical difference between a facility and a shutdown.