Now more than ever, healthcare companies need a lending partner that can help them intelligently navigate—yet still innovate—in an increasingly intricate industry.
Healthcare is hot. But as this industry grows, innovates and shifts to meet the demands of America’s ample aging population, accessible working capital will also remain in high demand. Right now, for example, the changing reimbursement environment is critically impacting how financing is delivered. Finding a lender that understands modern healthcare’s most pressing issues is the only way companies can compete in this increasingly restricted and scrutinized industry.
Healthcare companies trying to take the next step in the lifecycle are facing serious working capital challenges when it comes to:
- Merging to create economies of scale to overcome tightening profit margins
- Building and maintaining a technology infrastructure
- Outshining—and out-marketing—increased competition
- Upgrading service location and quality to meeting changing consumer demands
- Meeting legal requirements—even beyond the Affordable Care Act
- Adding new offerings based on demographic trends dominated by aging Baby Boomers
- Adhering to and accounting for strict government oversight and regulations
Gibraltar regularly works with healthcare entrepreneurs who are finding it very hard to be entrepreneurial in today’s restricted environment. Asset based lending is sought after because it offers greater liquidity and flexibility than a traditional commercial bank loan, but lenders must get creative with today’s healthcare borrowers.
A healthier capital prescription
Healthcare doesn’t fit the typical model for asset based lending, or lines of credit secured by both accounts receivable and inventory. Inventory in the Healthcare setting is typically too specialized or disposable in nature, making it hard to resell in the event of a default. Additionally, unlike other industries where a lender can accurately value A/R, many healthcare companies rarely collect more than 50-60% of their gross A/R within 90 days of delivering the service due to documentation requirements, health-plan reimbursement disallowances, and the difficulty of collecting on past-due accounts over 90 days and patient-responsible balances.
Even more challenging is accurately valuing the net collectable on a receivable. Providers establish fee structures and then negotiate different pricing with different insurance companies. That means reimbursement changes based on the insurer and Medicare/Medicaid can drastically affect the net amount collected on the services provided. There are also different payment cycles within healthcare sectors: some types of providers are routinely paid within 15 days of submitting claims; others can take over 90 days to be reimbursed.
Lending by the law
Legal considerations are even more complicated in non-traditional healthcare financing, such as factoring, in which a lender “buys” a company’s “futures.” Companies can still factor, however due to the good-intentioned Social Security Amendments of 1972, the government can only pay the provider of the services, not the factoring company. To avoid penalty from the Centers for Medicare Services’ stringent reimbursement auditing investigations, healthcare companies that wish to factor must adhere to the law and work with a lender that understands the increasingly complex documentation requirements.
There are also legal implications tied to Medicare and Medicaid payments. A provider is required to open two collection accounts—one for electronic payments from Medicare and Medicaid, and one for collections from non-governmental organizations. The lender, bank and borrower place a revocable deposit account control agreement (DACA) with a zero balance transfer (ZBA) on the government account and an irrevocable DACA sweep on the non-government account. The outflow from the government account is to the non-government account via ZBA and the outflow from the non-government account is to lender via a daily wire.
If that has your head spinning, you’re not alone. Now more than ever, healthcare companies need a lending partner that can help them intelligently navigate—yet still innovate—in an increasingly intricate industry.
Chief Credit Officer – Gibraltar Credit Opportunities