For my first client-wide article, I want to talk about some grapevine stuff I am hearing about a new patient financing company that may be entering the orthodontic marketplace during the coming year. There are a lot of patient financing companies now and new ones are perpetually coming and going but one of the new ones, the rumors say, has quite a twist. This new organization may be what is commonly called a financial “Factor.” Once I have some facts I will write more, but against the possibility that there is a factoring company coming into the profession, I thought this email would be a good way to make sure each of our clients understand what a Factor is or can be.
To my knowledge, there has never been a factoring company that has made inroads in the orthodontic profession, although one or two has tried, so most orthodontists have never been exposed to the concept. So, here is an explanation for those of you unfamiliar with the term “Factor.”
A Factor is a person or a company that purchases the contracts receivable from a company, such as an orthodontic practice, as those contracts are first billed (when the case is started). The Factor takes a percentage of the bill, typically 3% to 5%, and pays the selling orthodontist more or less “on the spot” the 95% to 97% of the face value of the contract. The Factor does all of the billing, all of the collection activity, sometimes all of the insurance billing and processing, and assumes all contract related risk, including absorbing any loss from non-paying customers of the doctor. Typically the Factor does no risk identification and simply buys every contract that the practice wants to sell.
Right about now this may be sounding pretty good to you! A third party company buys your high risk contracts, or any other contracts you may want to sell. They pay you quickly, after taking their cut, and handle the account from then on, with no recourse back to you if the patient does not pay. You no longer need a Financial Coordinator or, if you are a large practice, an Insurance Coordinator. Starting to sound even better isn’t it? You may even be thinking, “if I can sell the Factor all my cases, with long term financing and very low or even $0 down payments, my case acceptance will go up and the extra revenue from those starts will more than make up for the high discount the Factor takes.”
Well, welcome to the dark side! Many Factors require that their clients sell 100% of their newly generated contracts to the Factor. Factors almost always charge interest, sometimes onerous interest, to the customers (your patients). One company that briefly tried a form of factoring in the orthodontic world had in their contract a requirement that the orthodontist terminate treatment on patients once the doctor had been notified that the patient’s contract had become 60 days delinquent. Would you put up with that requirement when you have no control over the delinquency control process? Legal liability would be massive! Many patients do not like paying an outside “finance company” instead of paying their doctor directly, especially if there is an interest charge. Think about the 80%+ of your patients who immediately reject the idea of financing their account with CareCredit or any of the other orthodontic financing companies. However, with many Factoring companies the patients are given no choice in the matter. Patients can no longer work with an empathetic Financial Coordinator if they have a financial issue. Overall case acceptance typically will not improve, because good case acceptance depends on much, much more than flexible financial arrangements. Consider your case acceptance rate on new patients referred by other patients. If you are typical, your case acceptance rate on such patients is above 80% (on the other hand case acceptance on patients referred by dentists is between 50% and 65%). When the patients no longer have a financial relationship with the practice, and that financial relationship is with a Factor, maintaining the current rate of patient referrals becomes impossible. New patient flow declines and the rate of case acceptance does as well. Of course, you will have better case acceptance among the “B-” and “C” patients who, among our client base, make up 10% to 20% of new exams. Those “B-” and “C” patients are those who have a rate of failed/cancelled appointments and a rate of poor clinical cooperation that is double the rate of your other patients. Such patients are also the source of the majority of malpractice suits!
There’s another issue. What about your cash flow. Orthodontists enjoy steady cash flow because of the monthly payments they receive from their accounts receivable. Yes, they receive revenue from paids in full and from down payments, but the lion’s share of monthly revenue comes from those monthly payments. Two years after signing up with a Factor that requires that your new starts’ contracts be sold to them, your accounts receivable are $0! Your cash flow now is 100% dependent on new case starts. Say good-bye to vacations and you will need a big slush fund to help you through the Fall and Spring production downturns.
There is precedent for all of my doom-saying. There is at least one Factor that has been active in the general dental field for all 33 years I have been consulting. I have been an “expert witness” in lawsuits by dentists against that company. If you get into Google and read the long list of horror stories of destroyed dental practices and bankrupted dentists, you will have some insight into the truth about factoring in the dental profession, at least as it applies to that particular company. Our recommendation to our clients is that you not do business with a Factor, and beware the “testimonial” statements from orthodontists if those doctors happen to be investors!
There is more that should be said. All Factors are not alike. There may be some whose contracts require full “recourse”, meaning that the selling doctor must repurchase the account balances that are delinquent beyond a certain number of days. There could, theoretically, be Factors that have contracts that work well and have none of the negatives I have described. Only time will tell what comes on the scene.
Another issue is that a young orthodontist just out of school may be highly attracted to a company that will pay him/her 95%-97% of the contract immediately upon the case start. The problem is that many Factors require that the entire accounts receivable be repurchased in order for the customer (the orthodontist in this case) to cancel the contractual agreement. That requires a major bank loan which may or may not be available. Other Factors may require that a “Reserve” fund be held back from the amount paid to the doctor for each case start to cover losses for patients who do not pay. That reserve fund can be substantial. Each factoring company is different and they all have different rules and policies. I have never seen a factoring company that I would want one of my clients to participate with, but that does not mean that a new company coming on the scene might not have different policies and rules that a client of ours could live with.
My point? Be highly diligent and highly skeptical. Remember what I said about “testimonials” from investor orthodontists. My personal opinion is that a Factor is not a business that a client of ours should work with, but that opinion is based on past experience with the only Factor we know that exists in the dental profession. I anxiously await the opportunity to read the contract this new company will require doctors to sign. Perhaps my concerns are groundless. You can count on me to let you know!
