Whe Victor Battaglia found out about the number of restrictions banks would attach to a loan for his company, he worried those strings would become ties that bind.
"There's way too many restrictions on how much money you could spend and how you could spend the money," says Battaglia, chief financial officer of HPC America, a Sharon Hill, Pa.-based home infusion company that has a physician practice management subsidiary. "If you spend any money, you have to ask the bank first."
It's been three years since Battaglia sought a bank loan, but as he talks, his frustration builds as the ghosts of bankers past slowly appear before him.
"Then you guys run the company!" he tells them.
With banks not an option, Battaglia's company turned to a form of fund raising that got its start in the garment industry: accounts-receivable financing. It requires a physician group to either sell the payment due on uncollected bills to a third party in return for instant cash, a process called factoring, or put those bills up as collateral for a loan.
Practices are thinking more about accounts-receivable financing as an option for several reasons. Among the most important is that physicians collect smaller payments upfront from patients in lieu of managed-care insurers paying claims.
At the same time account balances are growing larger, insurers increasingly are taking longer to make reimbursements.
Another reason is that privately held physician practice management companies are reluctant to go public because of the volatile stock market.
According to experts, there's quite a pile of receivables ready to be tapped. One company in the receivables-financing business, Portland, Ore.-based Medcap, figures physicians, hospitals and other healthcare providers have outstanding bills of $28 billion from Medicare, Medicaid and other public programs alone.
To physicians, receivables financing can appear to be a godsend because it can eliminate cash-flow problems caused by erratic claims repayment. Plus, they don't have to use other assets as collateral.
While in some other industries the use of accounts-receivable financing connotes a company making a last-gasp, quick-fix attempt at funding its survival, that hasn't been true in healthcare. One notable exception is once-mighty Coastal Physician Services, a Durham, N.C.-based PPM company that last spring financed $151 million in receivables to pay off debts. The company had gotten into trouble when it expanded into ancillary businesses, forcing it to sell off pieces of its operations and find other ways to access capital.
The growing number of companies offering healthcare accounts-receivable financing say that more often physician practices use such deals to leverage their greatest asset-their billings-into growth capital.
"It's not an ugly stepsister anymore," says Steven Silver, vice president of Chevy Chase, Md.-based Healthcare Financial Partners, which went public in 1996, the first healthcare receivables financing company to do so. Through Sept. 30, 1997, the company had financed $218.5 million of receivables, compared with $89.3 million for all of 1996. Its 180 clients include 30 PPMs added in 1997.
However, there can be a high price to pay for getting the cash upfront. Including interest and fees, physician practices can end up paying a premium of at least 15%. The term "factoring" is shunned by many in the business because of companies that charged as much as a 40% premium.
At those rates, physician groups would be better off hiring more people to lean on insurance companies and patients to pay their bills, says John Runningen, a partner at Cordova Capital, an Atlanta-based venture capital company that has invested in a nursing home subacute-care provider using accounts-receivable financing.
"Receivables financing is one option for physicians, but a better option is to collect bills," Runningen says. "Or hire a professional collection service-anything that can get you more clout with insurance companies."
Here's how receivables financing works:
Say a physician group bills $1 million a year, with an average collection rate of 150 days. That means the group does not have 41% of its cash at any point of the year, the equivalent of $410,000. An accounts-receivable financing firm would step in and finance up to 80%, or $328,000, of that $410,000. The other 20% of receivables usually cannot be used for collateral because financing companies consider those bills uncollectable.
If the practice was taking a loan off its receivables, it would have a credit line of $328,000 that could be tapped at any time. The group and the lender would sign a three- to five-year agreement, with the interest rate on the loan set at the prime rate plus 1% to 2%, not including other fees and closing costs.
At a standard rate of about 15% total, that would mean practices would pay about $49,000 per year in interest costs.
A disadvantage of taking a loan is that the practice itself still will be responsible for collecting the receivables and using them to pay back the loan. However, the amount of the loan can be adjusted if the practice increases the amount of its receivables.
If the practice were selling its receivables, it would receive the $328,000 upfront, while the other 20% would be held as a reserve account by the factoring company. Fees would include 3% taken off the top of the reserve account, prime rate plus 2% interest on the bills not yet collected by the factoring company, and other closing costs.
Industry experts say the disadvantage of selling receivables is the fees paid to the finance company can get expensive. Also, checks in many cases are written weekly based on the amount of receivables the finance company collects. If it's a slow week, the practice might not get as much money as it had hoped.
"(Practices shouldn't) think how can they plug the hole in the dike but how can they make a more permanent change to improve the business practices in their offices," Runningen says.
Many financing companies have stayed out of healthcare receivables because of the complexity of the business. Challenges include the vagaries of trying to collect hundreds of relatively small bills that take 90 to 150 days to come due. Also, HCFA regulations ban practices from selling Medicare and Medicaid receivables, although they can be used as loan collateral.
Only 22% of the 241 receivables companies responding to a 1996 survey by Newton, Mass.-based Edwards Research Group sought healthcare business.
But that number may change. HPC America's Battaglia says that over the past six months he's been besieged by cold calls from finance companies seeking his receivables.
The growth of a company like Medcap also gives a hint of what's happening. Medcap, which buys receivables of between $300,000 and $10 million, expects its revenues to double annually over the next few years, says Louis Kern, Medcap's vice president of business development. The privately held company, which has focused exclusively on healthcare over the past five years, did not release specific revenue figures.
"We used to do a lot of advertising," Kern says. But physician interest is so strong Medcap now relies completely on word-of-mouth. "Our problem is we get (physician practices) lined up, and then we have to go out and get more funding on a regular basis" to cover the purchase price of the receivables, he says.
Medcap, like many receivables financing firms, sells bonds to raise money to finance practices. Because so many small companies are involved in healthcare receivable financing, Battaglia says he thoroughly checked potential partners' balance sheets to make sure they wouldn't default over the course of a long-term relationship. His lender, Healthcare Financial Partners, raised its capital through stock offerings.
For HPC America, accounts-receivable financing so far has worked to its advantage. The company received $2 million three years ago from Healthcare Financial and has added more receivables to the loan pile since then. In 1996 HPC America put up another $1.5 million in receivables for a loan in order to start up a practice management subsidiary called Quest Physician Services, which specializes in HIV-related treatment.
Now, HPC and Quest, also based in Sharon Hill, combined have $12 million in loans backed by receivables, money that has been used to add 15 to 20 physicians, buy laboratories and provide other working capital, Battaglia says. The companies probably will continue to use accounts-receivable financing until going public, a date that hasn't been determined, he says.