A New Healthcare Financing Business
A preliminary business plan for a new healthcare factoring company
In an effort to think through prospective ideas, I occasionally go through the exercise of writing a preliminary business plan. The following is a preliminary business plan for a healthcare factoring venture. Think Pipe.com, but for healthcare accounts receivable.
Independence Health
Mission
Enable digital health companies to grow and scale through invoice factoring. Make the process of billing insurance and managing accounts receivable (AR) easier.
Objectives Over Next Four Months: September 2022 - January 2023
Product. Start servicing 1-2 digital health companies by advancing claims with our own funds (~$100k) to better understand how invoice factoring works.
Tech. Bring the initial trading platform to market. Develop a preliminary risk score prediction engine that leverages prior claims data.
People. Assemble a team of engineers and marketers to lead the company through its rapid growth.
Financing. Raise 3M seed round in order to complete the trading platform, hire the requisite staff and provide liquidity to the nascent trading marketplace.
Tentative 2-year Plan
Following the launch in January 2023 we plan to achieve the following objectives:
Trading Volume. Issue $100 million annually to our set of healthcare clients and achieve an annual trading volume of at least $70 million.
Operations. Hire a high caliber team of software engineers, marketers, sales reps and financial analysts. Aim to grow the team to 15 by the end of the first year and 50 by the end of the second year.
Financing. Raise a $15M series A and a $50M debt instrument in order to support our growing team and provide liquidity to our growing exchange.
Problem
Healthcare providers and digital health upstarts face a problem with their accounts receivable. Dealing with health insurance claims reimbursement is a headache for most of the healthcare industry given that it takes payers ~60 days to fully pay out claims with only around 70% of claims being reimbursed. This creates an accounts receivable problem for healthcare companies that want to scale given that they need a dependable source of cash to spend on a myriad of expenses such as malpractice insurance, marketing, payroll, EMR technology as well as unexpected costs.
Product: Trading platform for healthcare accounts receivable
Independence Health is building a trading platform for healthcare accounts receivable that is based on invoiced claims to health insurers. We allow healthcare businesses to advance their claims and reliably receive money up front while investors get exposure to the cash flow these businesses generate. Said another way, we turn one’s accounts receivable into a tradable asset which healthcare companies can sell to investors eager to earn stable and reliable yield. Our exchange driven financing platform works as follows:
Clients send us the claims they wish to trade
Independence Health calculates a risk score based on one’s prior reimbursement history
Investors competitively bid on bundles of claims
Clients receive instant payout of insurance claims
Following proper reimbursement from payers, investors receive payout and earn yield.
We intend to primarily service digital health upstarts across the telehealth, pharmacy and medical device verticals as there has been a tremendous amount of growth in the digital health industry as can be seen by the over 1,000 full stack digital health companies that have come to market in the last three years alone. While instant payout solutions have existed, they have been reserved only for larger groups and have not been made available to healthcare upstarts.
A trading platform allows us to use the power of the open market to drive competition amongst bids and give our clients the best rates. Our flywheel continuously improves our business over time and works as follows:
Lower interest rates encourages investors to seek yield elsewhere which leads to more bids on our marketplace
More bids leads to more competitive pricing
Better prices allow Independence Health to be more competitive amongst alternative funding sources
This leads to more healthcare clients trading their AR through our platform
More clients leads to more trading volume and builds trust in our new asset class
We eventually plan to offer additional services such as patient billing, coding and credentialing to further help our clients deal with accepting insurance.
Summary of Key Competitive Advantages
Instantaneous payout of claims
Exchange flywheel drives more bids, better prices, more clients and more liquidity
Market: Healthcare Factoring
The company intends to focus initially on servicing digital health companies and traditional healthcare providers. We expect to see rapid growth particularly in our digital health customer base given the growth the industry has achieved to date (27% CAGR, $176B market size). In fact, over the last three years, there have been over 1,000 full stack digital health companies that have come to market.
Currently, the global factoring market size amounts to ~$3B. We expect this number to grow substantially given the flywheel explained above and the expansive $5T healthcare reimbursement market we service.
We plan to initially focus our efforts on digital health companies that already accept insurance (e.g. One Medical, Teladoc, Dr. On Demand, MDLIVE, etc.) before attempting to work with those that do not currently accept insurance.
Competitors
There are several traditional healthcare factoring businesses that exist today. Xynergy and PRN are two of the larger companies offering healthcare factoring services. Such businesses leverage their own capital to purchase AR.
Instead of operating as a traditional healthcare factoring business, Independence Health plans to launch an exchange where investors can competitively bid on AR deals. In addition to providing clients with the most competitive rates driven by an open market, our flywheel allows our model to continuously improve over time driving more investors, better prices and more trading volume. While we intend to initially provide liquidity to the marketplace with our own funds, we eventually plan to transition towards a pure exchange driven approach.
In addition to our exchange model, Independence Health leverages software to automatically approve and assess the risk associated with a specific client. Instead of waiting a couple of days to get approved from traditional healthcare factoring providers, Independence Health leverages its internal risk prediction engine and various EMR integrations to instantaneously approve clients and allow them to trade their AR immediately.
Business Model
Independence Health operates an exchange for healthcare AR. Instead of charging factoring fees as is commonplace in the factoring industry, Independence Health charges both the investor and healthcare client a 1% fee per transaction.
We plan to upcharge users for additional features such as patient billing and credentialing in the future.
Team
As can be seen from similar businesses such as Pipe, AR trading ventures require a significant capital investment. Therefore, the team should be equipped with leadership proficient at fundraising. We plan to target Cedar, Kareo, Oscar, Athena Health, Clover, Bright Health, Devoted Health among other digital health finance and insurance companies for an initial talent pool.
Vision
Digital health companies are increasingly shying away from accepting insurance given the laborious process involved with credentialing, billing and managing AR among other difficulties. While our initial goal is to help users manage their AR, our ultimate mission is to get more digital health companies to accept insurance so that they can more easily service the 297 million Americans that are insured. We envision a future where billing insurance is as easy as operating a cash pay model and seek to develop an ecosystem of features that digital health companies can leverage to more easily accept insurance.
While we could expand past healthcare and operate our factoring trading platform for other industries, we plan to focus exclusively on healthcare for the time being and develop specialized features for various verticals such as the telehealth, pharmacy and medical device sectors. We’ve observed that factoring businesses can be prone to poor management as can be seen by the downfall of Greensill Capital and plan to avoid such outcomes by focusing exclusively on a single industry and hiring a team with expertise across that industry.
Anticipated Financial Expenditures September 2022 - January 2023
Salaries ($300,000)
Software engineers (5 people at $12,500 / month + benefits)
Marketing lead ($12,500 / month + benefits)
Factoring Test Run ($100,000)
Rent & Utilities ($20,000)
G & A - including travel and legal ($25,000)
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Total Expenses: $445,000