Financing maneuvers: two opportunities to boost a hospital's working capital - factoring and asset-backed securities - Special Report

Healthcare Financial Management, Oct, 1991 by Sandra Ferconio, Michael R. Lane

Securitization, on the other hand, typically advances between 80 percent and 90 percent of neg eligible receivables. The remaining amount is overcollaterlization owned by the seller but not available for funding purposes. As a result, a typical securitized transaction will advance-fund from 30 percent to 40 percent more than factoring.

Cost of participation. Each program has a different cost structure that must be carefully considered before contracting for receivables financing begins. In a typical factoring transaction, costs to participate are based on three variables: a discount, a factoring fee, and penalties plus interest. While calculation of actual costs may be possible for the discount and fee components, penalties for delays or non-compliance with monitoring and reporting requirements imposed by the factor are not quantifiable at the beginning of a factoring relationship. As a result, a hospital selling its accounts receivables assumes an unquantifiable financial risk, which can be sizeable when factoring receivables.

Securitization, on the other hand, is structured not to substitute for a portion of the seller's collection and follow-up but to take advantage of an investment tool below prime rate. Omitting a servicing component and capitalizing on the favorable rates of the commercial paper market securitization the less expensive option.

Servicing and control. Estimates of hospitals' direct costs for performing patient accounting can range from a couple hundred thousand dollars to several million dollars, depending on bed size. Approximately half of these costs are personnel-related.

In a factoring transaction, the factor assumes control of servicing, and collecting accounts receivable, providing a benefit that a health-care organization must consider along with the higher cost of the program. Asset-backed securitization, on the other hand, is viewed as a more traditional financing mechanism without the service and control issues.

Because of staffing and workload issues confronting hospital patient accounting departments, the services provides by factors often are viewed as an attractive feature of the arrangement. On the other hand, a hospital that prefers to retain full control and responsibility for servicing accounts would find more benefits in securitization.

Program eligibility. Asset-backed securitization programs typically are limited to investment grade hospitals. Although credit ratings are provided for commercial paper, an organization's ability to obtain an A1 rating partially depends on reducing the threat of provider bankruptcy. Investment grade rated hospitals reduce that risk in the eyes of rating agencies and surety providers.

Factoring does not use commercial paper to fund receivables purchases. Consequently, credit ratings and hospital viability are less important. Program costs and service and control of the receivables function can compensate for the added risk. Troubled institutions desperately in need of greater cash flow often have pursued factoring as the "lender of last resort."