Poor cash flow can devastate your business

Philip Cohen

Sixteen percent, or $1.9 trillion, of the United States' gross domestic product (GDP) is currently being allocated for healthcare, and it's projected to reach $4 trillion (20 percent of the GDP) by 2015. On the surface, this appears to be a good thing because if more money is budgeted for healthcare, then more people can benefit from it. Yet there's an underlying irony--an increasing number of healthcare providers are operating in the red. In fact, according to the American Hospital Association, one-third of America's 5,000-plus hospitals are actually losing money, while another one-third is barely breaking even.

Who's to blame for this financial crisis?  Most would assume that healthcare institutions are the ones to blame and that they are not using their allotted sums appropriately.  In reality there are a number of culprits on the playing field.  An aging population, an increasing number of uninsured Americans and slow-paying government aid programs all play a part in cramping the healthcare system's budget. 

As the Baby Boomers begin celebrating their 65th birthdays, the surge in America's elderly adult population will start placing tremendous stress on the healthcare system because additional services will be necessary to manage their medical conditions.  In addition, there will be over 43 million retired adults depending solely on Medicare to cover their medical bills next year, a problem that I will delve into later in the article.

On the other hand, a large portion of our younger generations do not have health insurance at all.  Of the 47 million people who went uninsured in 2004, 31.4 percent were adults aged 25-34, according to the National Coalition on Health Care.  Rising health insurance premiums and overall poverty rates are both contributing to this problem. 

Expensive healthcare premiums make it harder for employers to afford coverage for their employees, creating an uninsured working class.  Health insurance expenses are the fastest growing cost component for employers.  So much so that according to Medical News Today, the proportion of the working class who received health insurance through their employers fell from 81.2 percent in 2001 to 77.4 percent in 2005.  The majority of the reason for this four percent decline was due to employees not participating in health benefits offered to them.  The Kaiser Commission on Medicaid and the Uninsured reported that 19 percent of full-time employees were uninsured in 2005.

Add in the fact that emergency rooms are obligated to care for any patient who comes through its doors regardless of whether they have insurance or not, and what do you get?  Answer: Millions of uninsured people who visit the emergency room to receive medical attention who are also relying on the hospital to foot the bill.

To make matters worse, the U.S Census Bureau reported that 37 million less fortunate people were living in the U.S. in 2005, and that number is still growing.  This underprivileged class is forced to either go uninsured or rely on Medicaid for their healthcare bills, and neither option is a promising solution to the healthcare cash crunch equation. 

The Medicaid program is the largest source of funding for medical services for America's poorest people.  According to the Centers for Medicare & Medicaid Services, Medicaid's reimbursements have rapidly increased since the late nineties.  Cumulative spending for the Medicaid program increased to $316 billion in 2004. 

Medicare's reimbursements have also increased rapidly over the years.  Designed to provide basic medical coverage for adults aged 65 and above who are no longer working, Medicare's collective spending reached $336 billion in 2005 according to preliminary data from the 2006 Chartbook on Trends in the Health of Americans.

Although Medicaid and Medicare can be beneficial for underprivileged and elderly Americans in need of healthcare, American medical institutions don't fare quite as well in the financial cash flow crisis because they have to wait so long before they can be paid.

Medicaid and Medicare make their payments slowly and in many cases, the government-mandated payments don't cover the actual cost of providing care.  Unfortunately, healthcare institutions are left to fend for themselves.  Even though they are required to provide medical attention to those who are uninsured or who are covered by Medicaid or Medicare, hospitals and nursing homes cannot count on being recompensed adequately for their mandatory medical services. 

Therefore, as a direct result of the cash crunch, hospitals and nursing homes are forced to make cuts in staffing and decrease technological advances to help defray costs.  In addition, many healthcare institutions have started outsourcing positions to save money.  For example, hospitals and nursing homes make cuts in staffing and special programming, as well as decrease capital spending, all of which could be harmful to their patients.  Another way that institutions cut back is by outsourcing positions and providing terms of net-30, net-60 or higher to their vendors. 

With all that said, it's easy to see how the healthcare facilities are affected by this cash crunch, but you may be asking: How does this affect my healthcare staffing business? 

Starting up or expanding your own business can be a difficult task, especially if your clients are taking months to pay for your services.  Oftentimes, your entrepreneurial dreams of landing bigger contracts or hiring additional employees are overshadowed by the fact that you do not have enough present working capital to meet payroll or pay taxes.

Now that you have had a thorough explanation of the healthcare funding crisis and you understand how it could affect your medical staffing business, you have the knowledge to structure your business in such a way that it can sustain a system of slow payers.  For some medical staffing companies, that may mean selectively choosing facilities that will honor the terms of their contracts.  However, for medical staffing firms who are trying to get started or who are trying to expand their business, being picky about their customers or being too demanding on their invoices might not be the best option.  For companies in this situation, it might be easier to look into an alternative means of financing to help cope with a slow cash flow.

In fact, startups and companies in an expansion phase might be better off using an accounts receivable factoring company to combat slow payers.  An accounts receivable factor purchases a business's invoices and advances a percentage of that invoice immediately.  So rather than waiting 30, 60, 90 days or more to receive payment from healthcare facilities, nurse staffing agencies could benefit by having the cash for their invoices now, and in turn, the factor waits to receive the delayed payments.

Either route you take, there are some general tricks for getting paid quicker.  For example, writing the terms (i.e. net 30) directly on the invoices, supplying the accounts payable department with the invoices in a timely manner, and/or indicating on the invoice that interest will be tacked on for those paid beyond term.  If all else fails, threaten to stop staffing until checks are cut for past due invoices, and most importantly, follow through with the threat.

The aging population and increasing number of uninsured patients are going to continue to grow, placing even more stress on the United States' healthcare system in the future.  This situation creates a huge market for the temporary medical staffing industry but at the same time, it guarantees that payments from healthcare facilities will continue to be slow.  However, applying the techniques discussed in this article and exploring some of the alternative financing methods listed herein will ensure medical staffing agencies the ability to survive and thrive in an environment where they would otherwise fail.

Philip Cohen is the founder and president of PRN Funding, LLC, which is an extraordinarily focused niche player in the health care services funding market place.  Through a process known as factoring, PRN Funding provides business owners with the financial resources needed to grow and effectively compete in the market place. With no minimums or fixed terms, PRN Funding provides medical staffing agencies with flexible and immediate access to capital.  We give you the freedom to factor what you want, when you want, whom you want, for as long as you want.  Prior to founding PRN Funding, Mr. Cohen was an executive officer of The MRC Group, a national provider of Medical Transcription Services.  Contact Philip Cohen at toll-free 866.776.5407 or via email at pcohen@prnfunding.com.  Please visit PRN Funding, LLC on the web at PRNFunding.com.