Accounts receivable insurance: A boon to health care financial risk management

Accounts receivable management is a complex arena for health care systems. It becomes even more complicated when the economy is in a state of flux and patients increasingly struggle to cover their out-of-pocket costs.

Disruptions to or spotty cash flow—or just inefficient AR financial practices—seriously impede the ability of hospitals and physician practices alike to run smoothly and meet their obligations. They pay the price in reduced liquidity and delays in meeting payroll, not to mention challenges covering expenses. Further, the ability to invest is hampered.

The cost of caring puts everyone in a bind: hospitals and health systems along with patients. By 2023, one analysis found, one in three inpatient claims that providers submitted to commercial insurers were unpaid for more than three months.

The issue is worsened by Medicare and Medicaid underpayments, which a new American Hospital Association report says creates a shortfall that’s advancing by 14% annually. Further, practices of some Medicare Advantage plans have caused their reimbursements to fall by 8.8% since 2019. Then there’s the new U.S. tariff policies that are expected to raise hospital expenses by 15% in the near term.

There’s no single strategy to mitigate the financial risks the current environment is aggravating. But one financial tool that a growing number of health care organizations recognize has value is accounts receivable insurance, also known as trade credit insurance.

Here’s what’s important to know.

How accounts receivable insurance works

While this insurance isn’t mandated for health organizations, they may find, as other business sectors have, that it works well as a tool to buttress financial health and stability. Put simply, it’s a specialized commercial line of insurance that provides a safety net against the risk of financial losses due to non-payment for services.

The risks covered include:

• A payor’s insolvency
• Defaulting on or delayed payments
• Non-acceptance of goods
• Losses resulting from war or civil unrest
• Currency devaluation
  

Accounts receivable coverage may begin at the start of a contract, when goods are shipped, or when services are rendered or invoiced. Should a covered health claim or invoice go unpaid, the insured provider is compensated for a portion of the unpaid amount.

Many hospitals operate with fairly slim profit margins, which may make them reluctant to spend on credit insurance. However, when payments are defaulted on or delayed, thin margins can make it that much harder to overcome such losses.

Better yet – accounts receivable insurance can be a bonus for growth

Many businesses may not think of trade credit insurance as a lever to increased financing and growth. But consider the following:

• Accounts receivable is often mandatory for credit. While accounts receivable is often one of the largest assets on a balance sheet, it’s often uninsured. Many financial institutions won’t offer credit terms for lending on accounts receivable unless those receivables are insured.
• The policy can lead to increased credit. As it provides the creditor with additional security, accounts receivable insurance can mean better terms for a borrower. For example, a lender could boost the margin ratio from 75% to 90% when the borrower has trade credit insurance. So for a company insuring $10 million in receivables, the increase could result in $1.5 million more in financing.
• Additional financing results in more flexibility. Additional financing can create greater flexibility and confidence, allowing organizations to enter into contracts or conditions that might not otherwise be available.

Additional capital can also be leveraged into faster incremental growth while protecting against critical risk. What’s more, if companies take the opportunity to use extra financing to facilitate growth, the additional revenue and profit can help offset the cost of the trade credit insurance.

Pete Reilly is the practice leader and Chief Sales Officer of global insurance brokerage Hub International’s North American healthcare practice.

In this role, he directs and coordinates HUB’s healthcare planning, growth and strategic initiatives. He also works with other leaders and experts within HUB to develop and introduce proprietary products that will help healthcare organizations and providers across the care delivery spectrum.