A Quick look at the Why and How of Medical AR Financing


A Quick look at the Why and How of Medical AR Financing

A California-based medical practice with 5 doctors had been in the business for half a decade now. Although all went well, like any other business, the medical group suddenly found itself in need of finances. The medical billing procedures, the ever-changing billing codes, the complicated insurance claim management procedures, and the denials kept delaying payments from Insurance. The question arose: How can medical bills be quickly converted into payments within a few days and working capital be arranged on time?

And one of the doctors suggested, Health Insurance Receivables Financing!

Medical AR Financing or Receivables Finance or Medical Receivables Factoring is a non-banking funding option that physicians, pharmacies, medical groups, small to large-scale physicians’ practices, medical equipment companies, and even imaging centers can use to receive funds upfront on the basis of their account receivables. You get your working capital, your business keeps running smoothly and the burden of collecting your receivables now shifts on to the financing.

Technically, what is Medical AR factoring?

A financial transaction by means of which a business sells its receivables to a financing company. The latter of course, charges a certain percentage of the amount as the cost of financing and convenience.

How does it work?

Typically, you can choose either of the two financing routes:
• Finance companies/Banks purchase your medical bills, while your office or your medical billing company handle the billing and collections.
• Medical billing companies offer AR Finance, file claims, and collect from insurance payers.

Financing could be a one-time loan or a long term arrangement. Here is how it typically works:

1. After a medical practice or a physician bills the patient and the patient’s health insurance company for medical services, the healthcare provider approaches a Medical AR Financing company.
2. The financing company conducts its own set of analysis on your medical claims, such as establishing clear evidence that the service was really rendered, the appropriateness of the amount billed, and assessment of the net collectible amount.
3. The financing company then funds around 80% of the net collectible amount and charges a rate of interest on the amount advanced as a fee. In the event the financing company receives more than the expected reimbursement from the insurance carrier, the balance amount is paid to the healthcare provider.


How is it useful? What are your benefits?

  • You now have a stable and predictable cash flow: You can now plan your budget, afford to retain quality staff and enhance your services.
  • You can focus better on patient care: Since the concern regarding the operating capital to keep the business running is always on top of the mind. If you are financially sorted, you are really sorted! You can focus better on your patients.
  • It is not a debt on your balance sheet! Yes, speaking in accounting terms, AR funding is not a debt or a loan. You are simply selling your non-liquid assets (receivables) in return of liquid assets (cash) for a certain price. So, your debt capacity remains intact.

In a factoring agreement, it is important to assess the extent to which you want to factor monthly. You may want to sell just 30-40% of your receivables or you may want to free up all your money that’s held up in the invoices. Your business situation is unique and so are your needs. Fix your goals, set the expectations right and make the most out of this arrangement!

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