Receivables purchasing firm NCFE declares bankruptcy

One firm's problems are not indicative of the industry as a whole.

By Robert Kazel, amednews staff. Dec. 2, 2002.

Doctors' practices and hospitals across the nation last month were urgently trying to find alternative sources of cash after the leading U.S. company that provides financing to health care organizations by taking over their unpaid patient accounts declared Chapter 11 bankruptcy.

Dublin, Ohio-based National Century Financial Enterprises on Nov. 18 asked a U.S. Bankruptcy Court for the Southern District of Ohio in Columbus for protection from its creditors. The filing came two days after the FBI raided the company's offices and seized records in an attempt to determine if financial improprieties had spurred the rapid nosedive.

See related content

As of mid-November, NCFE had not made scheduled financing payments to its clients, including medical practices and national physician staffing firms serving hospitals, for about 45 days. The company's plight already had begun to cause turmoil among some of its clients, even forcing some to consider or to file for Chapter 11 protection themselves.

An 11-year history

NCFE had been in the receivables purchasing business for 11 years. The company's business rose markedly in the past few years as managed care caused longer payment delays.

Physicians' practices and other groups typically entered into three-year contracts with NCFE by which the company would purchase medical receivables for 97 cents on the dollar, minus substantial fees and interest. A monthly reconciliation arrangement was built into the agreement that essentially charged clients if their purchased receivables failed to deliver as hoped. The cut-rate receivables that were acquired were packaged and invested in various bond funds by NCFE.

Some NCFE clients that had become used to ongoing receivables financing appeared to be especially endangered. One firm, PhyAmerica Physician Group of Durham, N.C., employs more than 1,500 emergency physicians in 29 states and had been selling its receivables to NCFE for cash as well as receiving investments in its business by NCFE. It filed Chapter 11 when NCFE's troubles became widely known, about a week before NCFE filed for bankruptcy.

The financing company's troubles approached the boiling point earlier this year when investor services slashed its bond ratings, asserting that the company had purchased medical receivables using reserve funds that were intended to protect bondholders' interests.

There was little certainty about how its physician and hospital clients would be affected in the long run. Meanwhile, clients appeared to be attempting to locate alternative sources of funding quickly.

Payment status unknown

NCFE spokesman Jim Nickell would not say whether doctor practices and other clients might ever receive payments owed to them. "Certainly there will be some impact on those organizations," he said.

The company's clients included large physician management groups, home health care companies and smaller hospitals that cannot afford to issue their own bonds and may not want to go to a bank, Nickell said. Selling the receivables was attractive because, unlike bank loans that use medical receivables as collateral, the purchase of the receivables outright did not saddle clients with additional debt on their balance sheets.

Receivables collection firms buy a practice's uncollected bills at a discounted rate.

The typical customers were "in need of a quick infusion because they are needing additional working capital to pay employees, or looking at an acquisition," Nickell said. The minimum amount of receivables that the company would take on was $1 million a year, and the average amount was $5 million to $6 million, he said.

Nickell said shortly before the Chapter 11 filing that "tens of millions" of dollars in medical receivables remained unspent and were in a "locked box" account managed by bank trustees. But he said the interests of bondholders would be the top priority.

NCFE's financing recipients were still bound by their contracts to continue to turn over their monthly receivables to the locked-box fund, he said. The company also was fighting efforts by some of its clients, such as PhyAmerica, to get around contract requirements by contacting insurers directly and collecting all they can without NCFE.

Industry will continue

Despite all of this, principals of other financing firms say the receivables financing industry for health care remains viable and is even likely to grow more rapidly in the future. They say the problems of NCFE appear to stem from poor financial decisions made by that company, not anything endemic to the field of asset-backed financing.

Dana Robinson, principal of Roslindale, Mass.-based Poseidon Capital Funding, said the financing companies for which he is a broker are successfully acquiring medical accounts because doctors and hospitals are fed up with waiting 90 or 120 days for payments from managed care companies. "When you're only in line for $100, it hurts," he said.

Financing companies that acquire medical receivables are willing to take on high risk in a sector that can be unpredictable, and banks often do not want to gamble by giving loans to practices or medical institutions that are facing severe financial trouble, he said. Providers of receivables financing are filling an essential niche desired by the medical industry, he added.

"Health care isn't going anywhere," Robinson said. "Everyone needs health care, and there are always going to be physicians that need capital. One of the fallacies in the medical industry is that all physicians are well-off, and that's not the case. They're always struggling to get paid from insurance companies."

ADDITIONAL INFORMATION:

Alluring concept can have adverse effects

For some physicians, the idea of receivables financing is compelling: Tapping dormant money for operating cash, debt consolidation, equipment financing, staff salaries or even bankruptcy financing.

But health care consultants and attorneys advise physicians to look carefully before they leap.

For most doctors, increasing turnaround of claims and using rules-engine software offered by practice management firms will boost payment rates and make special financing unnecessary. "Don't let [claims] stack up," said Bill Bristow, a Knoxville, Tenn.-based health care consultant. "Get them out the door, get them out clean."
Relying on monthly receivables financing can become addictive, leading to excessive spending and a failure to resolve what is causing a practice to be unsuccessful in the first place. According to David C. Scroggins, a health care consultant in Cincinnati, "Does [financing] solve the problem? Probably not. It's like someone who is trying to diet who only eats more." Also, receivables collections may fall below expectations at any time, and the doctor will face charge-backs instead of an income stream. "They kind of get behind the eight ball. If the payments stop tomorrow, they have bills but probably no cash flow," Scroggins said.
It's prudent to consult a lawyer and an accountant and try to consult other doctors who have taken a similar financing route, said Paul E. Risner, an Orlando, Fla., attorney who represents physicians and health care systems. If selling the receivable seems to be absolutely necessary, go over the contract carefully.

"It's the old maxim that if it seems to be too good to be true, it probably is," he said, "I tell physicians all the time, the front page [of the contract] is where you get all the benefits, and the rest of the 50 pages is where they take it away from you."

RELATED CONTENT
» Going south: How one hospital company crashed and burned Dec. 2, 2002