> ## Documentation Index > Fetch the complete documentation index at: https://mso.getlemma.com/llms.txt > Use this file to discover all available pages before exploring further. # Working capital and lending against healthcare AR > The credentialing J-curve, deductible-season swings, and payer lag all create working-capital need. MSO-level debt, AR facilities, factoring, and the Medicare constraint that shapes them. 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. ## Where the need comes from ### 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](/concepts/finance/how-investors-read-mso-pc-financials). ### 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. ### 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. ### 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.** ## The financing options | Option | Lends against | Sits at | Typical fit | | ---------------------------------- | ------------------------------------------- | ------------------------- | ------------------------------------------ | | **Equity** | The story | MSO | Early stage, or funding a step change | | **Venture debt** | The MSO's fee stream and its equity backing | MSO | Venture-backed groups, alongside a round | | **Bank line of credit** | Cash flow and covenants | MSO | Established groups with clean financials | | **AR-based facility** | The PCs' receivables | Borrowing base across PCs | Groups with substantial, agedable AR | | **Factoring** | Purchased receivables | Per PC | Expensive; a last resort | | **Practice acquisition financing** | The acquired practice's cash flow | MSO | Roll-up strategies | | **Personal guarantees** | The founders | Everywhere, unfortunately | Common early; negotiate them off over time | ## 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. ### 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. ### 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](/concepts/model/what-msos-can-and-cant-do). ## 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. ## 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. | They check | Because | | ------------------------------------------------------- | ----------------------------------------------------------- | | Was the management fee actually paid in cash? | It is the MSO's revenue and their repayment source | | Are intercompany loans documented with notes and rates? | Undocumented transfers suggest the entities aren't separate | | Are books maintained per entity? | They need to know which entity owns what | | Does the MSA survive a CPOM challenge in each state? | An unenforceable MSA means no fee stream | | Is the AR real and agedable? | Old AR collects at a steep discount | | What is the payer concentration? | One contract loss can impair the collateral | | What is the denial rate? | It predicts realizable value of the AR | ## 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?](/concepts/payments/what-is-a-clearinghouse). ## 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](https://www.cms.gov/regulations-and-guidance/guidance/manuals/internet-only-manuals-ioms-items/cms018912) (reassignment provisions). Verify current rules and their application to any proposed facility with healthcare finance counsel. ## Related topics - [Produce investor-grade financial reporting](/guides/banking/produce-investor-reporting.md) - [Move money between PC and MSO (the right way)](/guides/banking/move-money-mso-pc.md) - [Prepare for taxes across entities](/guides/banking/prepare-for-taxes.md) - [Where the profit lives: MSO economics and fee structures](/concepts/finance/where-the-profit-lives.md) - [How investors read MSO-PC financials](/concepts/finance/how-investors-read-mso-pc-financials.md) - [Intercompany money movement](/concepts/banking/intercompany-money-movement.md) - [Intercompany loans between MSO and PC: structure and example clause](/reference/legal/intercompany-loan-note.md)