One of the immutable truths about healthcare is that it can take a long time to get paid. Though Texas has a prompt payment statute,1 it can take 60 days or longer for a claim to be paid. Disputed claims can get pushed out an additional 60 days. The wait is even longer – sometimes years – for medical claims of plaintiffs involved in lawsuits. In between the service and the payment, health care providers do without.
Even after the delay, some claims never get paid. Patients may not have insurance or plaintiffs may lose their case. And even when claims do get paid, the health care provider loses out on the interest they could have earned on their money had they been paid promptly.
Delays and uncertainties in payment make the healthcare industry uniquely attractive to factoring arrangements. As a result, medical factoring (or medical receivables factoring) is becoming more common.
Practitioners should understand how these arrangements work and have them reviewed by a qualified attorney before entering into these arrangements.
Factoring is not new. Its origins can be traced back to the Mesopotamian culture and the Code of Hammurabi.2
Factoring occurs when a business sells its accounts receivable (i.e., invoices) to a third party at a discount in exchange for immediate capital. In the health care context, a financing company (the “factor”), “advances” to the healthcare provider (the “seller”), some amount in exchange for the seller’s accounts receivables for the medical services provided to patients. The party responsible for payment (the “account debtor”) will make payment directly to the factor.
With the advance in hand, the health care provider has immediate working capital, no longer has to deal with the costs and expenses of ongoing collection efforts, and avoids the risk of non-payment. This translates into more predictable revenues.
How Medical Factoring Works
Let’s look at a common arrangement.
The healthcare provider provides a medical service to a patient. Because of the inevitable delay in payment, and the possibility that the provider will never be paid, the provider decides to sell the account receivable to a third-party at an amount less than the full invoice amount.
After verifying the invoices, the factor will pay the seller the advance, which is either a percentage discount of the amount due or a flat-fee per invoice.
The seller will issue the invoices with the factor’s payment information affixed directly to the invoice. Either the seller will mail out the invoices or the factor will choose to do it.
Included with the invoice, or sent separately, will be a letter to the account debtor to inform them that the account has been purchased and payment should be made directly to the factor. The letter is usually signed by the factor and the seller and will extol the benefits of this arrangement as a benefit to the debtor.
As payment is made by the debtor, the factor will report back to the seller so that both parties are aware of the transaction and can assess the value of the arrangement to their business.
While this is a common arrangement, the specific terms of the factoring agreement can vary widely.
Recourse vs. Non-Recourse
Factoring agreements may either be recourse or non-recourse agreements. In recourse agreements, if the factor is unable to collect on the account, the seller will “buy back” the uncollected debt. This type of arrangement effectively shifts the risk of non-payment back to the seller.
In non-recourse arrangements, the risk of non-payment falls on the factor. If the account debtor does not pay the invoice, the factor has no right to recover the advance from the seller. The factor takes the loss.
In medical factoring, non-recourse agreements are most common. The fact that the provider does not have to bear the risk of non-payment is one of the primary incentives for the provider to sell the account receivables at a discount.
Purchase vs. Advance vs. Reserve
The way the factor pays for the account also varies.
In some arrangements, the factor purchases the account outright, either for a discounted percentage of the amount due or a flat-fee for each procedure.
In other cases, the factor will “advance” the account debtor some percentage of the amount due. This percentage varies but usually maxes out at 80%. When (or if) the factor finally collects the account, the remaining balance (the “rebate”) is paid to the account debtor, minus a fee for the factoring company’s collection efforts.
The fee charged by the factor could be a flat-rate, a tiered rate, or a “prime plus” rate.
In a flat-rate arrangement, the factor is paid a set percentage of the account upon collection. In a tiered arrangement, the fee depends on the size of the amount owed, the volume of the debt the factor is collecting for the debtor, and the time or effort it took to collect on the account. A prime plus rate adjusts the fee based on the prime interest rate.
To offset as much of the non-recourse risk as possible, some factors will maintain an amount in a reserve account throughout the relationship with the seller. The reserve account is typically 10–15% of the seller’s credit line. The factor can dip into this reserve to soften the impact of non-payment.
While factoring agreements are popular, they can have other implications for a health care provider.
Factoring Accounts for Plaintiffs Involved in Litigation
In the litigation context, when a plaintiff has medical bills, the defendant will want to know how much a factor paid for the accounts. The defendant will try to limit the damages to that amount.3 Thus, defense attorneys may attempt to obtain the factoring agreement to discover its terms and thereby limit damages.
Getting the account debtor to pay the factor rather than the health care provider is relatively straight-forward when dealing with private insurance companies or cash-pay patients. The arrangement becomes more complex when dealing with government reimbursement programs like Medicare, Medicaid, or Tricare because of the “anti-assignment” provisions of the Social Security Act.4
Factoring companies require that the providers assign the financial rights for their insurance claims to them. However, federal reimbursement rules forbid the assignment of claims to third-parties. Such programs will only reimburse the provider, or their employee or billing agent. They most certainly will not issue reimbursement in the name of the third-party factor.
To factor federal claims, a managed account is used. The factor will purchase the account receivable, but the payment information will remain with the seller. The federal government reimburses the claim directly to the seller by payment into the seller’s account. The seller implements a regular “sweep” of the account to an account controlled by the factor.
There may also be fraud and abuse implications for federal claims. A fee charged by the factor that is not related to the fair market value of similar arrangements or is not commercially reasonable could imply a kickback under the Anti-Kickback Statute or improper remuneration in violation of the Stark Law (“Ethics in Patient Referrals Act”).
The factor and the health care provider should take steps to make sure the factoring arrangement is appropriate and does not create unanticipated problems.
The Terms of the Factoring Agreement Should Be Negotiated at Arms-Length
The factor and the seller should negotiate the terms of the agreement at arms-length. Terms should be consistent with those common in the medical receivables factoring space. The arrangement should make sense for the factor and the seller without regard to any upstream referrals.
In a straight factoring arrangement, this may not be an issue. But if the factoring company has any relationship with a potential referral source, federal and state law prohibits the factor from receiving anything of value in exchange for patient referrals. The health care provider is also prohibited from paying anything of value for the referrals.
To avoid these prohibitions, there should be no sweetheart terms for either party. If lines of credit are utilized, they should impose a reasonable interest rate. If the factoring agreement is non-recourse, concessions should not be made for non-payment. Treat non-recourse agreements like non-recourse agreements.
Terms Should Be Commercially Reasonable
The terms should be commercially reasonable for both parties. As to the health care provider, they should serve the purpose of providing them immediate capital and offset the risk of non-payment, while not giving up too much by way of the discount.
Without taking into account any patient referrals, does the factoring arrangement make good business sense? Does it serve a legitimate business purpose? The provider should document the costs, delays, and burdens of collecting the debt before and after the factoring agreement. Is the provider better off with the arrangement? If so, then it is probably commercially reasonable. If not, then revisit the terms of the arrangement.
Properly Identify the Eligible Receivables
The factor should ensure that receivables to be purchased have the requisite indicia of recoverability. If the factor is going to purchase a receivable, there should be a reasonable basis to believe the account will be paid. It is therefore vital to properly identify the characteristics an “eligible receivable” must satisfy before it will be sold to the factor. For example, a claim will need to be one in which the service or procedure was covered, the patient was eligible, and the claim was approved. Without these characteristics, the claim is unlikely to get paid.
Securing the Receivables
Healthcare receivables are considered collateral under U.C.C. Article 9. Factors should perfect their security interest in the receivables by filing the appropriate financing statement. The factor may also want to perfect a security interest in the deposit account where the proceeds are deposited when the receivables are paid. To do so, the factor must have control of the account.
Obtaining a security interest in the deposit account is not an option for Medicare and Medicaid funds. Centers for Medicare and Medicaid Services (CMS) prohibits the customary UCC control agreement giving the factor the right to direct funds from the account that receives CMS reimbursement. Nevertheless, the factor can perfect a security interest in the receivables themselves through the appropriate UCC-1 filings and security agreement with the seller.
Understand the Terms of the Agreement
Finally, the health care provider should understand the terms of the agreement, and what other, more positive terms, may be available with a bit of negotiation.
In this regard, it is important to seek the counsel of an attorney with experience with medical factoring agreements.
Delays and uncertainties in getting paid for medical services make medical factoring attractive in the healthcare industry. But all factoring agreements are not created equally.
Health care providers should understand how these arrangements work and have them reviewed by a qualified attorney before entering into these arrangements.
To understand how medical factoring can work for you, contact me at 214-588-3040 or firstname.lastname@example.org.
- Texas Insurance Code, Ch. 542
- Factoring and Accounts Receivable Discounting. An Evidence from the Egyptian Market]
- Haygood v. Escabedo, 356 S.W.3d 390, 396-97 (Tex. 2012)(Under Tex. Civ. Prac. & Rem. Code, § 41.015, a plaintiff cannot recover amounts charged by a health care provider that the provider has no legal right to be paid.)
- 42 U.S.C. § 407