COVID-19 has forced many hospitals and health systems to stop the elective procedures that make up the lion’s share of their revenue. This of course, has led to wide-spread short-term cash flow issues.
As their leadership seeks new ways to navigate cash flow challenges brought on by the pandemic, innovative organizations have stepped forward to offer new takes on traditional financial solutions. Collateral Velocity is a pioneering example, launching new, low-cost alternatives that give cash-strapped providers low-cost options in accelerating revenues.
A good starting point for understanding how these solutions fit into the existing landscape of healthcare finance opportunities, it’s helpful to look at the differences between traditional options of business A/R financing, and an alternative, healthcare factoring.
Defining Business A/R Financing
Similar to a traditional bank loan, this documentation-heavy option can be secured against different kinds of collateral, including invoices, real estate, and equipment to borrow cash as needed. It’s available through banks, brokers and lending institutions, though a preferred option might be a government guaranteed loan like an SBA 7a and is often easier to secure than alternatives.
A good example of this is Jack Henry Associates, a leading Fintech firm that has recently launched their BusinessManager® solution which integrates into its core SilverLake System® platform, streamlining A/R financing. The integration enables financial institutions to provide faster, more efficient, and more accurate financing to their bank customers across a variety of industries.
Defining Healthcare Factoring
Healthcare factoring, or third-party medical receivables factoring, is a non-bank financing option that involves the outright sale of invoices at a discounted rate to an invoice factoring company (or “factor”) in return for cash, less a “factoring fee”. The factor then bundles those claims as short-term, fixed income securities and sells them to investors.
The hospital or health system receives an advance, passing the responsibility for A/R on to the factor. The provider is usually permitted to pick and choose which invoices to sell, essentially turning the factor into their business credit manager and A/R department for the selected invoices.
Both options involve the analysis of existing A/R and transition to the bank or factor after choosing which invoices they will accept as collateral. Either option can be used depending on the needs, circumstances, and risk aspects of the financial institution and healthcare organization. To determine which is optimal, it is important to understand the differences regarding a few factors.
In healthcare factoring, the factor buys invoices and at the same time, assumes responsibility for collection of debt, saving the provider money and resources in paying employees to manage A/R.
With a loan, the bank does not perform A/R and a hospital or health system must still invest internal resources for the collection of debt.
Overall, factoring offers:
- Easier qualification
- A simple fee structure to track total costs on a per-invoice basis
A/R financing offers:
- More affordable fee structures (though this is changing)
- Easier transition after bankability
- Less effort in identifying a company specialized in the skills needed to take on A/R management
Extracting critical data from claim and remittance data helps feed these downstream systems. This critical component requires a high degree of accuracy so these financial calculations can be done properly. That’s where companies like OrboGraph come into play, to enable the factoring process.