Medical Accounts Receivables Funding Industry Evolves in Wake of NCFE

When National Century Financial Enterprises collapsed in 2002 under the pressure of a federal investigation into fraud and money laundering charges, medical accounts receivables (MAR) funding companies who bought third party medical claims were generally untapped financing sources for most health care providers.

The MAR process involves a healthcare provider borrowing money against the receivables on its books. In a lot of cases, the receivables are third-party, meaning the money is to be paid by insurance companies or Medicare and Medicaid programs

Industry insiders say most MAR customers were either large health care systems with millions in monthly receivables, or small, cash-strapped operators struggling to stay afloat. However, industry insiders tell insideARM that the economic turmoil that is creating sweeping changes to credit markets will force more hospitals and health care providers to expand their funding options as financing dries up benefiting MAR companies.

“More and more of the financial writers and medical publications I read, show one lesson: don’t put all your eggs in one basket,” Michael Koslow, Sun Capital HealthCare Inc.’s senior vice president of marketing, told insideARM.

Kaulkin Ginsberg Healthcare Analyst Michael Klozotsky said health care providers will have to be flexible to address the ever-growing cash flow challenges they face. And more hospital executives appear open to selling or borrowing against their third party health care receivables even before the credit crunch began.

“The medical debt purchasing market has come a long way in the past 4-5 years, due in large part to relationships based on open communication between hospitals challenged to manage cash flows and experienced debt buyers with knowledge of the healthcare industry and a keen awareness of the distinctive characteristics of patient—as opposed to generic consumer—accounts,” said Klozotsky.  “That growth, in combination with a down economy, has paved the way for the emergence of a medical factoring market, albeit one still in its infancy.”

Sun Capital was able to grow its client base, in part, by working with the bankruptcy court to help some former NCFE customers.  Koslow said the Boca Raton, Fla.-based firm has bought several billion dollars worth of receivables over 10 years, serving primarily small-bed community and rural hospitals.

Still, the MAR funding industry was tarnished by NCFE’s demise. It’s estimated that NCFE made $3.25 billion in private placements before it collapsed, taking down nearly 275 companies with it (“Hospital Debt Buyers Convicted of Fraud and Money Laundering,” March 17). 

"There was a lot of chaos in the market because a lot of providers were depending on it for funding,” said Kent Harlan, of Ozarks Capital Funding, a Springfield, Mo.-based financial consulting firm specializing in non-bank financing for businesses and health care providers.

Although some health care providers trust in the industry was shaken, Koslow said some others came to realize that NCFE’s demise was an isolated case.

“The issue isn’t medical receivables funding,” he said. “There are still healthy and viable companies.  The courts themselves recognized that (MAR) were providing a very valuable service.”

As health care providers grapple with mounting bad debt expense from self-pay accounts and infrastructure and technology needs, the industry’s biggest challenge nowadays will be its ability to educate health care financial executives about the various MAR funding options, Koslow said. For example, pure medical account receivables factoring companies like Sun Capital Healthcare will buy third party receivables outright.  “We assume the risk,” he said.

Some asset-based lending firms offer lump-sum loans against the estimated value of a batch of medical receivables, while others extend credit lines backed by the receivables.

Koslow said he believes Sun Capital’s business model, which is similar to traditional commercial factoring companies, uniquely positions it to best compete in the MAR funding arena in the coming years.

“Our funding isn’t dependent on credit markets,” he said. “Our funding sources are private investments. We are not lending money, we are buying an asset. “

Koslow added that Sun Capital buys receivables on a claim-by-claim basis and that its rates are fixed.

“Our discount fee depends on the actual amount of time you’re using the money,” he said. “It gives the CFO an awful lot of flexibility in determining how he uses the money.”

But whether health care creditors opt to work with a medical factor, asset based lender or establish a line of credit, industry experts say strong health care providers needn’t collapse if their MAR funding source does. Asset-based lenders, whether financed by private investors or hedge funds, most operate under the same regulatory rules as banks, Koslow said. Meanwhile, private equity investors in MAR firms monitor the companies’ results and transactions closely, Harlan said.

“The same is typically true with the debt financing, as the factor frequently reports changes in their portfolio to the bank officer,” Harlan said. “These checks and balances should help prevent what happened with NCFE.”