Lines of credit: A tool to boost reserves and sustain cash flow at your practice

The revenue cycle model for a medical practice is more complex than many other businesses, and a line of credit can be a lifesaver for a practice dealing with operational disruptions, from implementing a new electronic health record system (EHR) to the eventual switch to the International Classification of Diseases-10th Revision (ICD-10), to dealing with accounts receivable issues.

These issues mean a credit line can be an important financial tool for managing cash flow in a medical practice.

While I advocate for low- or no-debt business models, that’s not always possible in today’s business climate, given the requirements and changes faced by physicians.

A practice has to balance the pros and cons of financing versus taking a line of credit. Cash is king, as long as you don’t deplete your cash to a point where a crisis will send you into another crisis.

Financing has its place, particularly if it is short-term and you don’t want to use up your credit line. But the credit line is important because it is always there for that unexpected (or expected) expenditure that every medical practice must face from time to time.

How much is appropriate?

I recommend a 90-day cash reserve. Calculate your current cash reserve situation, and then figure out the difference between what you have now and what you need. That number is an appropriate amount for a line of credit.

Uses for credit

A major use of a credit line for a medical practice is the ability to draw down on accounts receivable. 

This is a problem that tends to be unique among medical practices. Not because they aren’t getting paid by customers, but because it is difficult some times to define just who is the customer. Third-party payers are not necessarily reliable when it comes to timely payments, and patients cannot always readily afford to pay high-deductible and high copay amounts.

Under the Affordable Care Act, many patients are going from low deductible and copay plans to very high deductible and co-pay plans. For some of these patients, the practice is going to have to work out some kind of payment plan, which spreads your expected revenue over a longer period of time. For others, it means little or no payment at all. The former is a good use of a credit line while the latter should be dealt with in other ways, such as employing tools and strategies to get non-paying patients to pay. This is a function of financial policies rather than borrowing.

It is easy to see how a practice’s finances can shift dynamically over short periods of time. While a line of credit can help to ease these cash flow problems, it is important to note that it won’t fix problems related to bad revenue cycle management.

Another use of a line of credit is for purchasing an EHR system, which can add training costs and lead to a short-term productivity drop. And even with a one-year delay of ICD-10, it could be a death knell for practices that are unprepared because it may mean a delay in payment. Under these circumstances, a credit line may be needed to keep the practice running.

Frank Cohen, MPA, is the senior analyst for The Frank Cohen Group, and a Medical Economics editorial consultant. Send your practice management questions to [email protected].