Healthcare providers, like all businesses, need multiple kinds of capital, often in sizable amounts. Their receivables play into those financing structures in complex ways. Providers, like any business, use capital to buy buildings and equipment, finance growth in staff and services, and smooth out the problems of cash management. But unlike most businesses, the healthcare industry has limitations, legal and otherwise, on what they can do with their receivables, especially those that spring from patient billing.  

Healthcare receivables themselves are rarely if ever repackaged and sold into a secondary market. This secondary market is stymied by two facts:

1. Hospital receivables are regulated much more strictly than other receivables (such as car payments)
2. Hospitals negotiate the right to buy the debt back to avoid any instances that could potentially hurt the hospitals’ reputations.

 

Unlike other receivables purchases (e.g. leases, consumer credit cards), healthcare receivables have buy-back provisions, whereby the sellers always have the right to buy back the receivables. 

This last point has grown in importance since a series of scandals involving aggressive collection tactics led to bad press, a series of hearings in the U.S. House and Senate, and class action lawsuits that targeted non-profit hospital billing and collection practices. Even in states with little oversight, providers are often non-profits or at least seen as providing a community benefit. An ugly scandal with an overly aggressive collections agency can hurt a reputation and jeopardize a non-profit status or the chance of getting a favorable municipal bond. 

Despite the restrictions on collections practices of receivables, there is still a large industry that either does this as a contractor for providers, or by purchasing receivables outright. Some examples of larger companies that have purchased receivables include CarVal Investors, MedCLR and West Asset Management, which purchased $1.2 billion of debt from Tenet for $16MM. However, there are hundreds of small buyers of this paper.  

Providers do find other avenues to getting credit for capitalization of expansion or cash flow management. One hospital administrator told of getting a HUD mortgage partially collateralized with revenue from future receivables expected from the new facility. The delay in reimbursements from Medicare and Medicaid are often smoothed out with short-term cash flow loans backed by these future payments.  

Providers are also able to borrow against assets like existing buildings or the expectation of future earnings.  But given the highly regulated nature of this industry, the forms of financing available drive what is actually done. The introduction of consumer credit directly into the mix is opening new doors for providers, though with the potential for serious negative consequences for consumers. Still, the possibilities for securitization of this debt and the creation of other vehicles could bring much-needed capital into the system.

Providers are also able to borrow against assets like existing buildings or the expectation of future earnings.  But given the highly regulated nature of this industry, the forms of financing available drive what is actually done.  

Revolving lines of credit may be secured by accounts receivables to address working capital and temporary liquidity needs, or private placement of tax-exempt bonds may be used to finance critical capital projects.¹

 

---

¹ http://www.hfma.org/NR/rdonlyres/F994EA9F-BD9F-4C6F-B6D4-FD14AEB81C23/0/FF2_No5_Strategies_w1.pdf

Instead of borrowing against their receivables, providers can sell receivables to collection agencies.  This process is complex and heavily regulated.  Three categories for unpaid healthcare receivables to help hospitals with revenue cycle management:  1) First Party, 2) Third Party (contingency collections) and 3) Debt Buyers. According to the rule of receivables purchases, they have to represent the self-pay, non-insured and charges not paid by insurance (uncovered costs).

Significant and increasing regulations govern collection practices.  Federal minimum standards were set under the Fair Debt Collection Practices Act and both the IRS and Congress are examining the billing and collection practices of non-profit hospitals.

Revenue cycle management (RCM) involves a series of steps that looks at potential problems and opportunities for enhancing revenue for a hospital. Steps include:

• Front end processes
• Charge description through coding
• Billing and follow-up of denials and bad debt
• Receipt of payer remittance

 

The healthcare revenue cycle is just beginning to feel the effects of consumerism as employers focus on containing healthcare costs. This means that today’s growing financial pressures on healthcare organizations will continue to increase as consumers bear an increased financial responsibility for their healthcare costs. Revenue cycle solutions that extend the capabilities of a hospital’s information systems are the key to improving access management, responding to healthcare consumerism, accelerating cash collection and improving payer performance.¹

 

---

¹ http://www.mckesson.com/en_us/McKesson.com/For%2BHealthcare%2BProviders/Hospitals/Revenue%2BCycle%2BManagement/Revenue%2BCycle%2BManagement.html

Provider’s receivables are being seen as more fungible and valuable, while providers find more ease in using their receivables to leverage cash flow and capital. The receivables industry is heavily scrutinized while the RCM industry is on the rise.  Providers have to keep pace with a changing industry and decreasing payments.  The fallout often falls on the patient who is not covered and cannot afford the expense.

• Anticipation of OOP expenses
• The better a provider is able to predict and manage their cash flow financing, the better able they are to manage the unpredictability of a patient’s ability to pay. Furthermore, if the provider’s office had a good handle of their cash flow financing then they may be advanced enough to help the patient anticipate their OOP.