Earlier this week, I gave an overview of the healthcare financial crisis that currently exists in our country. And I challenged you, as cash flow consultants, to take a part in solving the cash flow equation by offering your financial expertise to those vendors who sell to healthcare institutions. Allow me to elaborate.
There is an underlying irony in our country’s healthcare system. Fourteen percent (or $1.2 trillion) of the United States’ federal budget is spent on healthcare every year, which is more than any other country, yet one-third of our nation’s healthcare providers operate in the red, and another one-third are barely able to stay afloat. But how can that be? An aging Baby Boom population, a steady rise in uninsured Americans and inadequacies in the payment systems of government aid programs all add elements to the healthcare financial crisis equation.
The Baby-Boomers are getting older and living longer’So much so that by 2050, it is projected that one in five Americans will be included in the oldest adult segment, according to the U.S. Census Bureau. This surge of older adults is expected to cause a substantial flux in our country’s healthcare system because of the increased need for services that treat and manage chronic and acute health conditions for the elderly.
In addition to the aging population, rising health insurance premiums and a significant increase in federal healthcare coverage add more twists to the cash flow crisis. For example, 45 million Americans went uninsured last year, and almost half (20.6 million) were full-time employees whose employers could not afford to provide them with health insurance due to costly premiums. Now keep in mind that hospital emergency rooms are required to help any patient who walks through their doors, whether or not he/she has health insurance. So what happens when they provide medical care to a patient who is uninsured? The hospitals are left to foot the bill on their own.
Furthermore, a majority of unemployed Americans living in poverty, as well as the retired elderly adult population, depend solely on federal healthcare programs, such as Medicaid and Medicare, to pay their medical bills. Both programs appear to solve the cash flow problem because they pay for medical procedures that these people would otherwise be unable to pay for. But in reality, it’s not so simple.
Both federally funded programs pay slowly and more often than not, the cost of the actual medical care is higher than these programs are willing to reimburse. In the meantime, hospitals and nursing homes are forced to take the financial hit. Thus, the never-ending cycle begins. Healthcare institutions have to wait to be paid for their services, so they are unable to pay their bills on time. In other words, healthcare providers are not the only ones who suffer in this funding crisis’their vendors suffer too.
Welcome to the healthcare financial crisis equation. As cash flow consultants, you have the power to help this cash flow problem from the ground up. By reaching out to those vendors who are selling to healthcare institutions, understanding their positions and pairing them with a funding source, you have the ability to impact the healthcare funding crisis in a positive and revitalizing way. The trick is finding the right kind of financial assistance for these vendors.
Many of you may be asking the obvious. Why couldn’t the vendor just take out a small business loan from a bank? However, conventional borrowing increases business expenses because it creates debt that must be paid back, and it normally requires additional collateral that many of these healthcare vendors do not have. Not to mention that some companies, especially smaller ones, are turned down by banks because of tight borrowing regulations and restrictions. In addition, equity financing is generally harder to find than debt financing and once found, it takes longer to arrange, which does not address the company’s original need for working capital now.
However, another financial route works especially well for these healthcare vendors’ accounts receivable factoring. A viable option for companies in the early stages of business development and /or during rapid growth, factoring is a financial solution that gives companies immediate cash to manage operations more efficiently. Through the sale of its accounts receivable to a factor, a company can maintain their present obligations, such as payroll and taxes, without having to wait months to be paid.
Now that you have taken a moment to investigate the healthcare industry’s financial crisis, it’s easy to see how time plays such a crucial role in the payment process. It’s not a question of whether or not healthcare providers will pay their vendors, it’s a question of when they will be able to pay their vendors. Because they are paid slowly and inadequately, many hospitals and nursing homes provide their vendors terms of net-60 or longer, which means that they won’t consider paying an invoice until it is at least two months old. In other words, healthcare institutions do pay their bills, but they pay slowly. So if healthcare vendors would factor their receivables, they could stabilize their cash flow and continue servicing their clients, without having to worry about when they would get paid.
On that note, it is important to understand that there are two ways that a factoring company can handle healthcare receivables. One way introduces a third party (i.e. Medicaid, Medicare or private insurance company) to the invoicing process. For example, when you go to the doctor for a cold and you have health insurance, your doctor’s office sends a claim to your insurance provider after you have paid your portion (or co-pay), which bills your insurance company for the remainder of the bill. Because there are three parties involved (you, your doctor’s office and your insurance provider), the factoring deal is referred to as third-party medical receivables, which many of you are already very familiar with.
On the other hand, there is a vendor side to healthcare receivables, which oftentimes goes unnoticed in the factoring industry. A good way for any business to save money is to outsource work that the company does not specialize in. This works especially well for healthcare providers. For example, a nursing home could hire another company to cook all of their food and run their cafeteria services or a hospital could hire a temporary nurse staffing agency to meet it speak demand periods. Whatever the case, the bottom line is that each of these vendors end up waiting much longer to be paid than it would take for a traditional commercial transaction. Thus, these kinds of vendors could and should take advantage of all the benefits that factoring has to offer. So now that we have narrowed down the financing field to factoring, the next step is finding the right factor for the job. What are the pros and cons between choosing a big factor or small one, a general factor or a specialty one? Please stay turned for the next factoring blog post, which will go into further detail about these differences and more, and find out which type of factor would make the best fit for your healthcare clients.
NOTE: The Cash Poor Series was initially written as a three-part series written by Nikki Flores for the American Cash Flow Journal, which is no longer in publication. It was also published on PRN Funding’s web site.