Understanding the Terms Medical Factoring Companies Use

May 1, 2012 - PRLog -- Every field, whether its medicine, finance or sports has its unique language and terms. To understand a particular field, one must first have a good grasp of the different terms and how they are used together to make up the field’s unique language. Medical Factoring is a niche in the financing field and it is helpful to understand the terms below, which will allow you to have more intelligent conversations with lenders and ultimately make the best choice for your practice.

Factoring - is a transaction in which a business sells its accounts receivables to a third party--called a "factor"--in return for immediate cash, generally working capital to expand the business. In medical factoring, the accounts receivables are specifically those due from third party insurance carriers and government insurances (workers’ comp and/or personal injury cases can also be financed, though the process is a little different due to the longer time between billed date and date of payment).

Estimated Collectable Value (“ECV”) – Most medical providers’ bill third party insurance carriers a higher amount then they will actually collect. A factor will determine, based on the provider’s historical collection rate and industry standards, the ECV a provider can expect to receive for the invoices billed.

Advance Rate – Since a factor provides immediate cash for a receivable that will pay in the future, the factor will purchase the receivables at a discount. The amount the factor will pay for the receivable is known as the advance rate. In most medical factoring scenarios the advance rate is between 65% and 80% of ECV.  

Payor – the person or organization named in a bill or note who has to pay  the holder. In medical factoring, the payors are third party insurance carriers.

Factor Fee – Once the receivable is collected from the payor, the factor will recover his advance plus factor fee and return the rest to the medical provider. In most medical factoring cases, the factor fee is between 1.25% and 3%. This amount is determined on a 30 day basis.

Example – Doctor has rendered services on a patient and billed the insurance carrier (“carrier”) $100 for the procedure. The doctor’s ECV is determined to be 90%, so the factor can expect to collect $90 on this claim from the carrier. The doctor will sell the receivable to factor and factor will advance the doctor $72 (80% of ECV). The bill is paid two months from the factoring date and the factor fee is 2% per month. Therefore, upon the $90 payment from the payor, the factor will keep $72 (the initial advance) plus $3.60 ((factor fee* ECV (4%*$90)) and send the remainder ($14.40) back to the provider.

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About the Author: Ben Rutkevitz is the Managing Director of Alleon Capital Partners (“ACP”).  ACP is a specialty finance company focusing on providing capital solutions to the medical industry.  Its target is small to mid-size medical providers that bill Medicaid/Medicare, HMOs, Commercial Medical, No-Fault, Worker’s Compensation or await payments from Personal Injury Settlements.  To contact Ben Rutkevitz, please call 201-340-6346 or email him at benr@alleoncapital.com.  You can also visit Alleon Capital Partners at www.alleoncapital.com or at their blog, http://medicalfinancingreceivables.co.