True Price Of Medical Receivable Factoring
Medical centers have felt the recent slowdown in the economy as well. Despite popular belief on Capitol Hill, medical clinics need money to operate. When the economy is bad, it takes patients and insurance companies longer to pay off their bills. This has led many health care centers to consider selling these receivables to garner instant cash flows: a process known as medical receivable factoring.
Critics of factoring have been quick to point out that it is more expensive than traditional financing options (bank loans or issuing bonds). A bank loan for a medical center is usually somewhere in the ballpark of 10 percent per year. Whereas medical receivables financing is usually somewhere around 2 percent per month which is the equivalent of 24 percent per year. It’s not hard to see why critics have been lambasting factoring as a viable option for financing medical centers.
However, it should be noted that factoring is a different animal than borrowing. When a medical center works with a factoring company it is performing a sales transaction. When a center works with a bank, it is performing a loan. The two are quite different and make direct comparisons hard to understand.
If a medical center were to borrow 1.2 million dollars for a year at 10% at the end of the year the center would have to pay back the 1.2 million plus 120k in interest charges. However, if a medical center were to factor or sell 1.2 million dollars worth of insurance claims or receivables then at the end of the year the medical clinic doesn’t have to pay a dime, in fact it should be receiving money from the medical factoring company.
Assuming you understand the math behind a traditional loan, let’s look at how the medical receivables factoring arrangement would work out. The medical clinic sells 100k of receivables a month to the factor. The factor charges two percent per month and at the end of every month the factor is paid for the receivable by the patient or the insurance company. This means that the monthly factoring charge for the medical center is 100k X 2 percent or two thousand dollars a month. Because the receivables are paid for every month this amount resets every month instead of building on itself. So every month the medical center pays 2k for its advances. After 12 months the rate is only 24k, much lower than the 120k charged by a bank, and the same amount of money was borrowed. The difference is the amount of time the money was borrowed. In the above medical factoring example, the money was only borrowed for 30 day increments. Whereas with the loan it was borrowed for a whole year before payment was made.
As is usually the case, both the opponents and proponents of medical invoice factoring have good points. Factoring is probably not the best idea for the long haul because you’re selling your assets at less than their market value. However, it’s also not the complete scam that some critics claim it is.