A medical practice brings an accounts receivable ageing showing $3M outstanding and expects to borrow against $3M. The lender is looking at a number less than half that, and the gap is not a haircut. It is the difference between what was billed and what will ever be paid.
Why are healthcare receivables valued differently?
Because the billed amount is not the amount owed. Providers bill gross charges, and each payor pays according to a contracted fee schedule that is typically a fraction of those charges. The difference is a contractual allowance that was never collectible from anyone.
In most industries the invoice is the claim. In healthcare the claim is what the payor’s contract says it is, which makes the ageing report a starting point rather than a collateral schedule.
What is net collectible value?
Net collectible value is the estimate of what a receivables pool will actually convert to cash, after contractual allowances, expected denials, patient responsibility that will not be collected, and timing. Lenders advance against this figure, not against gross charges.
Getting to it requires historical collection data by payor, which is the first thing a lender asks for and the thing many practices cannot produce cleanly.
A worked example
A practice billing $1,000,000 of gross charges in a month:
| Line | Amount |
|---|---|
| Gross charges billed | $1,000,000 |
| Contractual allowances (55%) | ($550,000) |
| Net revenue | $450,000 |
| Expected denials and write-offs (4%) | ($18,000) |
| Net collectible value | $432,000 |
| Advance rate applied (75%) | |
| Availability | $324,000 |
A million dollars of billings supports $324,000 of borrowing, which is 32 cents on the gross dollar. Every step in that chain is arithmetic rather than judgement, and none of it is a comment on the quality of the practice.
How does payor mix change the answer?
Substantially, and along two dimensions: what each payor pays and how quickly.
| Payor type | Collection characteristics | Lender view |
|---|---|---|
| Commercial insurers | Contracted rates, moderate speed | Best collateral, subject to contract review |
| Medicare and Medicaid | Set fee schedules, predictable | Predictable but subject to programme rules |
| Managed care and capitation | Depends on the arrangement | Reviewed case by case |
| Workers’ compensation and auto | Slow, documentation heavy | Lower advance rates |
| Self-pay and patient balances | Highly variable collection | Usually excluded or heavily discounted |
The practical result is that two practices with identical revenue can be sized very differently. A predominantly commercial book with clean contracts is straightforward collateral. A book weighted toward personal injury liens or self-pay balances is not.
What are government payor receivables subject to?
Receivables due from federal healthcare programmes are governed by rules that restrict how payments may be assigned and to whom they may be made. Structures that finance them are built to work within those rules, typically involving specific account and lockbox arrangements rather than a direct assignment of the government claim.
This is a genuinely specialised area of law and the structuring is not something to improvise. Practices should expect any lender working in the space to have counsel that does this regularly, and should have their own review it.
What does a lender check first?
Four things, and only one of them is on the financial statements.
- Days in accounts receivable and the ageing by payor, since payor behaviour drives everything.
- Denial rate and the reason codes, because a rising denial rate is an early operational warning.
- Credentialing and contract status, since a receivable from a payor you are no longer contracted with behaves very differently.
- Billing system and cut-off discipline, because the ageing has to be reproducible.
Concentration also applies here, and it is easy to underestimate: a practice with one dominant commercial payor carries the same structural risk described in customer concentration, even though the payor is large and creditworthy.
Why do denials matter more than they look?
Because a denied claim is not a slow claim, it is a claim that has to be reworked and resubmitted inside a filing deadline, and a share of them never come back. In collateral terms denials behave like dilution: they are the gap between the invoice and the cash, computed the way factoring dilution describes.
A practice that reduces its denial rate improves its advance rate, which is a rare case of an operational fix with an immediate financing return.
What should a practice do before approaching a lender?
Produce twelve months of collections by payor against charges by payor, so the net collectible ratio is a measured figure rather than an estimate. Clean up the ageing by writing off what is genuinely uncollectible. And separate patient balances from insurance balances in the reporting, since they are different assets and lenders treat them differently.
The short version
Healthcare lending runs on net collectible value, not billed charges, and payor mix does most of the work in getting from one to the other. Produce your own collection history by payor before anyone asks, because the practice that can evidence its net collectible ratio gets sized on data and the one that cannot gets sized on caution.