Working capital and lending against healthcare AR

MSO-PC groups need working capital because care is delivered long before it is paid for, and because new entities generate expenses for months before generating revenue. Financing that gap runs into a structural constraint most lenders outside healthcare have not encountered: payer money must land in an account the provider controls, which shapes how any facility secured by healthcare receivables can be built.

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Where the need comes from

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The credentialing J-curve

The dominant one for growing groups. A new PC incurs the friendly owner’s stipend, a lease, staff, and systems for 90 to 180+ days before its first claim is paid. Every new state repeats it. A group opening three states a year is permanently financing three J-curves. This is not a startup phase you exit; it is the cost of the growth model, and it is one of the adjustments a quality-of-earnings review will scrutinize. See How investors read MSO-PC financials.

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Deductible season

Early in the plan year, most patients are pre-deductible. Payer payments drop and patient balances spike, and patient balances collect more slowly and less completely than payer balances. The result is a predictable annual cash trough. Forecast it; don’t rediscover it each January.

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Payer lag

Even a clean claim takes roughly 20 to 40 days from service to cash. A denied claim that must be appealed takes 90 to 180. Your AR is, structurally, a month or more of revenue permanently outstanding.

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Growth itself

Every additional clinician adds compensation cost immediately and revenue on a lag, first because of credentialing, then because of the AR cycle. Growth consumes cash even when unit economics are good.

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The financing options

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The structural wrinkle: whose receivables are they?

The question that makes healthcare AR lending different. The receivables belong to the PCs. The MSO has no equity in the PCs and no direct claim on their receivables — its claim is a contractual right to the management fee. So a lender wanting security over healthcare receivables faces a gap: the borrower it wants (the MSO, which its investors own) is not the entity that owns the collateral (the PCs, owned by clinicians). Common structural responses:

1. Lend to the MSO against the fee stream. Simplest. The lender underwrites the MSO’s contractual right to fees rather than the underlying receivables.
2. Add the PCs as guarantors or co-borrowers. Requires the friendly owners’ consent, board consents from each PC, and raises its own CPOM questions about the degree of control being exercised over the professional entities.
3. Take security over the PCs’ receivables with account control arrangements, which runs directly into the constraint below.

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The Medicare constraint

Medicare’s payment and reassignment rules restrict assignment of the right to receive payment; payment must generally be made to the provider or supplier that furnished the service, rather than to a third party such as a lender.¹ Practically, this means a lender cannot simply have Medicare pay it directly. Facilities secured by healthcare receivables are therefore commonly structured around:

• Payments landing in an account the provider controls, a lockbox or deposit account in the PC’s name
• A deposit account control agreement (DACA) giving the lender rights over that account rather than over the payment stream itself
• Sweeps to a lender-controlled account occurring after the funds have been received by the provider

This area combines Medicare payment rules, state anti-assignment provisions, Article 9 security interests, and CPOM control questions. Structures that work are structures healthcare finance counsel has built before. Do not let a generalist commercial lender paper this from a standard form — verify the current CMS rules and get healthcare-specific advice.

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The CPOM overlay

Every one of these structures grants a lender some degree of control over the PCs’ cash. That control has to be evaluated against the same indicia CPOM examines. A lender with a security interest and a control agreement is generally distinguishable from an MSO exercising unilateral authority over practice receipts — lenders are not the target of the doctrine. But the arrangement should be papered with the distinction in mind, particularly in states that recently codified control restrictions. See What an MSO can and can’t do.

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Factoring, read the terms

Factoring sells receivables at a discount for immediate cash. Fast, available to groups that cannot get conventional credit, and expensive. What to examine before signing:

• Effective annualized cost, not the headline discount rate. A “3% fee” on 45-day receivables is not 3% a year.
• Recourse vs non-recourse. With recourse, you bear the credit risk anyway — you have bought timing, not risk transfer.
• Notification. Will payers be notified to pay the factor? That is exactly where the Medicare constraint bites.
• Concentration limits and reserves.
• What happens on a denial, you likely repurchase the receivable.

Factoring is a reasonable bridge and a poor permanent structure.

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What lenders care about, the same hygiene investors do

Not a coincidence. Anyone underwriting an MSO-PC group is testing whether the entity relationships are real.

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Managing the need down

Cheaper than financing it:

• Start payer enrollment the day the PC has an EIN and Type 2 NPI, every week saved is a week of J-curve removed
• Enter charges same-day, days in AR starts at charge entry, not at payment
• Work rejections same-day, a claim stuck in a rejection loop is a claim aging toward timely filing
• Collect at the point of care, the cheapest dollar you will ever collect
• Forecast deductible season and hold reserves through it
• Sequence expansion so J-curves don’t stack, three states at once is three simultaneous cash drains
• Hold a reserve sized for a clearinghouse outage. The 2024 Change Healthcare event stopped collections for weeks for a large fraction of US practices. Cash reserve is the only mitigation that works regardless of cause. See What is a clearinghouse?.

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Sources

1. Medicare payment and reassignment rules restrict assignment of the right to payment. See 42 U.S.C. § 1395g and § 1395u(b)(6); CMS, Medicare Claims Processing Manual (reassignment provisions). Verify current rules and their application to any proposed facility with healthcare finance counsel.