anti assignment of medicare receivables

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Healthcare Financing Anti-assignment Limitations

By: Leslie J. Levinson , Robinson & Cole LLP

This article describes how to structure financing transactions for healthcare providers to overcome anti-assignment and collection limitations on Medicare and Medicaid receivables.

THE UNIFORM COMMERCIAL CODE (U.C.C.) GENERALLY prohibits restrictions on assignment, making it possible for secured lenders to obtain a perfected security interest in these assets. However, other regulations make it difficult for lenders to collect on these receivables. Lawyers, therefore, use a double lockbox mechanism to work around these federal regulations. You should be familiar with this structure and its legal status as defined in recent case law.

Introduction

Receivables, or “accounts” as defined under the U.C.C., are a valuable and common asset type to pledge to lenders in secured financings. They are simple to perfect, requiring only a general grant of the asset type in a security agreement along with the filing of a U.C.C. financing statement. However, many contracts that give rise to the underlying receivables also contain restrictions that on their face would prevent their assignment to lenders. These contractual anti-assignment clauses would be broad enough to greatly diminish the value of receivables as a form of collateral.

The U.C.C. solves this by rendering most contractual anti-assignment clauses ineffective. Under U.C.C. § 9-406, a term in an agreement between an account debtor (i.e., the party that owes payment to the borrower under the receivable) and the assignor or borrower that “prohibits, restricts, or requires the consent of the account debtor or person obligated on the promissory note to the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in, the account” is generally ineffective. A term that would result in a default of a contract if the underlying account is pledged is similarly rendered ineffective. This has allowed for borrowers to freely assign these assets and has made Asset-Based Loan financings more accessible to borrowers with large amounts of receivables.

However, a key aspect to an assignment from a lender’s perspective would be its right to receive payments from the account debtor. The U.C.C. has some lender-friendly provisions here but contains some restrictions relevant to the assignment of Medicare and Medicaid receivables. The anti-assignment override provided by the U.C.C. would not be of use to a lender that is unable to collect on those receivables from an account debtor (i.e., the government) during, say, an exercise of remedies. Fortunately for lenders, U.C.C. § 9-406(a) would require an account debtor to make a payment to an assignee (i.e., a lender) if adequate notice is provided to the account debtor. However, U.C.C. § 9-406(b) limits this right of payment if it is otherwise restricted “under law other than this article.”

In fact, the Medicare and Medicaid anti-assignment provisions, with limited exceptions, prohibit anyone, except the healthcare provider, from receiving payments from federal government healthcare programs. In order to comply with the anti-assignment provisions, a provider cannot assign its right to be paid to any other entity, including its lenders. However, as described below, there are cash-management techniques, which if properly structured, will enable the parties to arrange compliant financing transactions.

Anti-assignment Provisions – The Regulatory Framework

Pursuant to 42 C.F.R. § 424.73, except with respect to certain limited exceptions, “Medicare does not pay amounts that are due a provider to any other person under assignment, or power of attorney, or any other direct payment arrangement.” There are several exceptions to this anti-assignment provision, which apply only under limited circumstances but are generally described as payment to a government agency or entity, payment under assignment established by or in accordance with a court order, and payment to an agent who furnishes billing and collection services to the provider, all subject to certain conditions being met.

There are also specific anti-assignment provisions pertaining to each of Medicare Parts A and B. Part A covers hospital insurance benefits for the aged and disabled, while Part B includes supplementary medical insurance benefits for the aged and disabled. For Part A, 42 U.S.C.S. § 1395g(c) states in relevant part that “No payment which may be made to a provider of services under this title [42 U.S.C.S. § 1395 et seq.] for any service furnished to an individual shall be made to any other person under an assignment or power of attorney . . . ” with certain specified exceptions, such as with respect to an assignment to a government agency. For Part B, 42 U.S.C.S. § 1395u(b)(6) states in relevant part that, with certain listed exceptions, “No payment under this part [42 U.S.C.S. § 1395j et seq.] for a service provided to any individual shall . . . be made to anyone other than such individual or (pursuant to an assignment described in subparagraph (B)(ii) of Paragraph (3)) the physician or other person who provided the service . . . .”

In addition, 42 C.F.R. § 447.10, as outlined in Subsection (a), implements Section 1902(a)(32) of the Social Security Act “which prohibits State payments for Medicaid services to anyone other than a provider or beneficiary, except in specified circumstances.” Pursuant to Subsection (d), “Payment may be made only (1) To the provider; or (2) To the beneficiary if he is a noncash beneficiary eligible to receive the payment under § 447.25,” or as otherwise outlined in other sections of 42 C.F.R. § 447.10 (covering, for example, reassignments and payments to a billing agent, such as a billing service or an accounting firm in specified circumstances).

The Double Lockbox Mechanism

It is crucial for both borrowers and lenders, and their counsel, to understand and comply with all aspects of the anti-assignment provisions. The Medicare Claims Processing Manual (Manual), Chapter 1, Section 30.2.5, provides useful guidance to lenders in dealing with Medicare and Medicaid receivables. Specifically, the Manual states that payments due a provider may be sent to a bank for deposit in such provider’s account if certain conditions are met, including that the account be “in the provider/supplier’s name only and only the provider/supplier may issue any instructions on that account. The bank shall be bound by only the provider/ supplier’s instructions. No other agreement that the provider/ supplier has with a third party shall have any influence on the account. In other words, if a bank is under a standing order from the provider/supplier to transfer funds from the provider/ supplier’s account to the account of a financing entity in the same or another bank and the provider/supplier rescinds that order, the bank honors this rescission notwithstanding the fact that it is a breach of the provider/supplier’s agreement with the financing entity.”

Further, the Manual states that the bank “may provide financing to the provider/supplier, as long as the bank states in writing, in the loan agreement, that it waives its right of offset. Therefore, the bank may have a lending relationship with the provider/supplier and may also be the depository for Medicare receivables.” In accordance with the Manual, despite what a provider and lender may agree to in writing, the lender cannot purchase the provider’s Medicare receivables. Accordingly, in light of the above manual provisions, a common and well-accepted mechanism for providers and lenders to structure payments is to have the provider open multiple deposit accounts, with one in the name of provider that receives only Medicare and Medicaid payments. The provider then enters into a compliant arrangement with the bank that generally vests sole control of the account with the provider while having standing (yet revocable) instructions to sweep the monies from the account into another provider bank account that the lender can access and possibly control. This concept is often referred to as the “double lockbox.” Parties regularly elect to have the sweep occur daily in order to ensure funds are not accumulating in the government payments account.

In setting up a double lockbox, there are various details involved and both providers and lenders need to carefully address those to avoid running afoul of any applicable federal or state restrictions. An example of typical language in loan documents that utilize this double lockbox mechanism is as follows:

If any of the Account Debtors is a Governmental Authority, including, without limitation, Medicare and Medicaid (each a “Governmental Account Debtor”), Borrower shall ensure that all collections of such Accounts shall be paid directly to Accounts # XXXXXX, XXXXXX, XXXXXX, at Lender for Borrower (collectively, the “Governmental Accounts”). All funds deposited into the Governmental Accounts shall be transferred into the Borrower’s Operating Accounts by the close of each business day pursuant to that certain Sweep Account Agreement dated as of the date hereof (as amended, restated, replaced, extended, supplemented or otherwise modified from time to time, the “Sweep Agreement”) by and between Borrower and Lender.

While there has not been a significant amount of litigation concerning the validity of these arrangements, they have typically passed judicial muster. For example, in DFS Secured Healthcare Receivables Tr. v. Caregivers Great Lakes, Inc. , when referring to 42 U.S.C. S. § 1395g(c), the court stated that “On its face, this statute stands only for the proposition that Medicare funds cannot be paid directly by the government to someone other than the provider, but it does not prohibit a third party from receiving Medicare funds if they first flow through the provider.” 1

Further, in Lock Realty Corp. IX v. U.S. Health, LP , the court favorably cited DFS Secured Healthcare Receivables Trust and other cases that support the right to assign Medicare and Medicaid receivables and of third parties to collect on those amounts if they first flow through the provider. 2 These other cases include:

In re Missionary Baptist Foundation of America, Inc. (affirming the decision of the district court and holding that the bank took a valid security interest in the debtor’s accounts receivable due from medical care payments) 3
Credit Recovery Systems, LLC v. Hieke (“[T]he Court notes that neither the Medicare nor Medicaid statutes expressly proscribe a provider’s assignment of the general right to receive Medicare or Medicaid receivables to a nonprovider.”) 4
In re E. Boston Neighborhood Health Ctr. Corp . (“Nothing in these statutes prohibits the Debtor, as provider, from granting a security interest in its receivables under these programs or invalidates such security interests. By prohibiting the governmental insurer from making payment on the receivables to anyone other than the Debtor, the statutes may impair the Defendants’ ability to seek payment on the receivables from the governmental insurer without the provider’s cooperation, but that cooperation may well be available, and the statutes do not impair the Defendants’ ability to enforce their security interests once payment has been issued.”) 5
In re American Care Corp .(denying junior creditor’s motion to terminate adequate protection payment to senior creditor who was entitled such protection pursuant to its valid security interest in Medicare receivables) 6

The court in Lock Realty Corp. IX , concludes, “The financing arrangements in this are case are valid and in accord with the federal anti-assignment statute, so Lock Realty cannot enforce its judgment to the extent satisfaction would infringe on a superior interest in the receivables.” The court in Lock Realty Corp. IX also provided further insight on proper structuring by stating:

In other words, the intervenors’ rights in the funds flow through Americare since neither party can receive Medicare funds pursuant to their arraignment without subsequent judicial enforcement of the security agreement. Because the financing arrangements don’t provide a non-provider with the opportunity to submit a false claim, the concerns addressed by the anti-assignment statute aren’t implicated.7 A court-ordered assignment pursuant to 42 C.F.R. § 424.90, directing payment from AdminiStar to Health Care Services or National City Bank doesn’t violate federal law.

As the above illuminates, it is both possible and commonplace for lenders to offer financing to healthcare providers using Medicare and Medicaid receivables as collateral despite the existence of the anti-assignment provisions by using well documented, commercially acceptable, and compliant financing and collateral agreements. However, given the continued evolution in the way healthcare services are provided and financed, counsel for both providers and lenders must continue to stay abreast of all applicable laws, rules, regulations, and other interpretive guidance to ensure continuing compliance with all laws applicable to healthcare financings.

Les Levinson is a partner at Robinson & Cole LLP, New York, and Co-Chair of the firm’s Transactional Health Law practice group. He has represented private and public businesses throughout his more than 30-year career. Although Les maintains an active corporate and business law practice, he concentrates on the transactional, regulatory, and compliance representation of healthcare and life science clients, including home care and hospice companies, physician practices, hospitals, information technology and medical device companies, healthcare equipment providers, and healthcare investors and lenders.

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Healthcare Financing Anti-assignment Limitations

This practice note describes how to structure financing transactions for healthcare providers to overcome anti-assignment and collection limitations on Medicare and Medicaid receivables. The Uniform Commercial Code (UCC) generally prohibits restrictions on assignment, making it possible for secured lenders to obtain a perfected security interest in these assets. However, other regulations make it difficult for lenders to collect on these receivables. Lawyers, therefore, use a "double lockbox" mechanism to work around these federal regulations. You should be familiar with this structure and its legal status as defined in recent case law.

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A Primer for Lending on Governmental Health Care Receivables

While the best asset to have is cash, the next best assets to have are accounts receivable, which are the right to payment for services rendered or goods provided. In the health care industry, receivables are the right to payment for health care services rendered by a health care provider, which can be a hospital, physician's office, pharmacy, or another medical provider. This article will examine the health care receivables generated by skilled nursing facilities, with a focus on receivables to be paid by governmental programs (e.g., Medicare and Medicaid).

In the context of this article, governmental health care receivables are the right to payment by Medicare or Medicaid programs to a skilled nursing facility for the provision of certain covered services. These receivables differ from the ordinary accounts receivable in several distinct and important ways.

First, government receivables are highly regulated. A skilled nursing facility receiving such must be certified to participate in the Medicare and Medicaid programs and can lose the right to such payments if it fails to adhere to minimum standards of care and other standards required by such programs.
Secondly, while most accounts receivable have standard payment terms (with the provider of the goods or services knowing that, at a minimum, it will be paid within a set time frame), governmental health care receivables are not paid within a date certain payment time.
Thirdly, and probably most importantly, governmental health care receivables are not assignable by the payee/provider of goods and services. Ordinary course accounts receivable can be directly assigned to a lender as collateral; governmental health care receivables are expressly prohibited by statute from being assigned (see 42 U.S.C § 1396a(32) and 42 U.S.C. § 1395g(c)).

The drafters of the Medicare and Medicaid statutes sought to prohibit factoring of governmental health care receivables, which is the sale of the right to such payment, often at a discount, to a factoring lender, which then directly collects the payments over time. While the motivations behind such prohibitions are beyond the scope of this article, it is clear that the drafters wanted to avoid potential predatory collection actions by the purchaser of such accounts.

Given the unique characteristics of government health care receivables, how can an operator of a skilled nursing facility obtain accounts receivable financing? In its most basic form, a lender providing accounts receivable financing establishes "lockbox" accounts, controlled exclusively by the lender, into which payors make direct payments in respect of the accounts receivable. At first blush, lockbox accounts are problematic because reimbursements from government agencies must be directed into an account under the sole control of the provider of the services. Governmental receivables cannot, therefore, be directed into an account under the exclusive control of the lender. However, as long as the payment from the government agency is sent to a bank account from which the operator is free to make withdrawals, the payment is deemed made directly to the provider. Lenders and their borrowers can utilize alternate cash collection arrangements that keep the governmental agency requirements intact. A typical cash management arrangement involves the following:

Governmental health care receivables are directed to a deposit account in the name of the provider and under the control of such provider. Such deposit account is only used for the collection of governmental receivables. The depositary bank, provider and lender enter into a deposit account instructions and service agreement (DAISA) that provides for a daily sweep of the funds collected in such deposit account to another account in the provider's name. The DAISA typically provides that any alteration of the sweep instructions not approved by the lender is an event of default under the loan documents.
The account into which the funds from the governmental receivables deposit account are collected is usually an account covered by a deposit account control agreement (DACA), among the depositary bank, lender, and provider. This arrangement serves, inter alia, to perfect the lender's security interest in the cash collected in such account. The funds collected in this account are usually swept daily to an account in the lender's name and applied to the balance of the revolving loan.

It is important to remember that the anti-assignment provisions do not preclude a lender from taking and perfecting a security interest in health care receivables. Instead, these provisions limit the enforcement of the security interest with regard to the payor of the accounts receivable. Health care insurance receivables are specifically included the definition of "accounts" in which a security interest may be granted and perfected. UCC §9-102(a)(2). A "healthcare insurance receivable" is defined as an "interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for health-care goods or services provided". UCC §9-102(46). Perfection of a security interest in accounts under the UCC is accomplished by filing a UCC-1 financing statement with the Secretary of State of the state in which the provider is located. UCC §9-307. Section 9-408 of the UCC expressly acknowledges the anti-assignment provisions are applicable to health care receivables and invalidates contractual agreements and statutes that impair the creation, attachment, or perfection of a security interest or that provide that the creation, attachment, or perfection of a security interest gives rise to a default, breach, right of recoupment, claim, defense, termination, or remedy under a health care insurance receivable.

Section 9-408 of the UCC allows the grant of a limited security interest in health care receivables by the provider. This alters how a lender can enforce its lien and realize on the collateral in the event of default by a provider-borrower. The value to the lender of a security interest in health care receivables derives from the payments due and not from the present right to possess and control such receivables. The security interest permitted under UCC §9-408 therefore allows the lender to have a perfected, present security interest in future payables (the proceeds from the receivables). Such perfection protects the lender's interest in the proceeds of the health care receivables, protects the lender from further sale or assignment of the receivables, and preserves the priority of the lender's security interest over other secured creditors.

While the lender is able to perfect its security interest in the health care receivables through the filing of a UCC-1 financing statement and in the cash collected in deposit accounts through the use of deposit account control agreements, the lender does bear the risk that the provider will use the funds collected in the governmental receivables account other than as directed by the lender. A lender, therefore, must build provisions into its loan documents that address, and attempt to mitigate, these risks. A lender can reduce its risk by (a) increasing its initial and ongoing due diligence investigations into the provider, (b) limiting what health care receivables constitute "eligible accounts" to be included in the borrowing base, and (c) including additional representations, warranties, and covenants in the loan documents giving the lender more latitude with respect to remedies and other enforcement rights in the event of a default by the provider-borrower.

For more information, please contact any member of the Firm's Long Term Care Team .

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United States: Five Key Points Regarding The Assignment Of Receivables In Healthcare Transactions

In the healthcare investment arena, the securing of credit facilities is complicated by the so-called "anti-assignment" provisions of the Social Security Act and its implementing regulations. These provisions do not prohibit a provider from assigning or granting an effective security interest in Medicare and Medicaid receivables, but do prohibit any assignee or secured party from directly receiving the proceeds of such receivables. As a result, traditional securing structures must be modified and institutions that finance healthcare entities must consider the following:

Required Offset Waivers . As part of the Medicare enrollment process, enrollees are required to obtain offset waivers from their financing institutions for deposit accounts maintained with such financing institutions that will directly receive proceeds from Medicare or Medicaid receivables. As a result, until these proceeds are moved to a different deposit account at the direction of the provider, financing institutions are unable to offset against funds on deposit in the initial deposit account that holds Medicare or Medicaid receivables against outstanding loans. For this reason, a provider should be required to segregate its receivables into two different lockboxes: one dedicated to the receipt of Medicare and Medicaid receivables (and subject to the offset waiver) and one dedicated to the receipt of all other receivables (and not subject to the offset waiver).
Provider-Controlled Receivables . Regulations promulgated by CMS require that all proceeds of Medicare and Medicaid receivables must be initially paid to a deposit account with respect to which only the provider can give instructions. As a result, such a deposit account cannot be subject to a customary UCC "control agreement" whereby the bank agrees to give the lender the right to direct the disposition of funds in the deposit account. The lender, therefore, cannot obtain a direct security interest in such a deposit account through the use of a control agreement. However, the lender will continue to have an indirect security interest in all amounts on deposit in the deposit account as proceeds of its perfected security interest in the Medicare and Medicaid receivables themselves (which would arise by making the appropriate UCC-1 filings and executing a security agreement covering the receivables with the relevant debtor/borrower). Nevertheless, a lender's recourse against such proceeds of Medicare and Medicaid receivables is limited until they are moved out of the initial deposit account.
Double Lockbox Structure . To address the inability of a lender to offset against the initial deposit account or obtain a direct security interest in such deposit account through use of a control agreement, lenders commonly require a "double lockbox" structure. As indicated above, the provider should already have segregated its receivables payments into two dedicated lockboxes. The lender will require that all proceeds deposited in the dedicated Medicare/Medicaid lockbox account be swept out on a daily basis to either the nongovernment lockbox account or another deposit account subject to the control of the lender. Lenders and providers will commonly enter into agreements with the depositary bank whereby the provider instructs the depositary bank to sweep the contents of this account into a lender-controlled lockbox account at the end of each day. If the borrower ever desires to change these standing instructions, the agreement governing such account will normally require that the borrower provide 3–10 days' prior written notice of such change to both the lender and the bank and/or provide that the bank will notify the lender of the change a certain number of days prior to the instructions becoming effective. Moreover, the loan agreement with the borrower will commonly provide that an unauthorized change in the standing instruction to move funds to the lender-controlled lockbox account will result in an immediate default that would suspend the obligation of the lender to continue making loans to the borrower.
Self-Help Unavailable . In the event of a default, traditional UCC "self-help" provisions generally cannot be used to cause the account debtor on Medicare and Medicaid accounts receivable (the U.S. government) to pay the lender directly, because CMS regulations prohibit assignees from directly receiving Medicare and Medicaid receivables. These regulations do contain exceptions to this prohibition against paying an assignee directly; however, a court order would be required and the assignee may be liable for overpayments as if it were the provider.
Other Governmental Healthcare Programs . Lenders financing healthcare entities that have other types of healthcare-related governmental receivables, such as Energy Employees Occupational Illness Compensation Program Act receivables or Black Lung Benefits Act receivables, face similar restrictions on the assignment of receivables under the Federal Assignment of Claims Act. Although the Federal Assignment of Claims Act contains a financing exception for claims aggregating at least $1,000, in order for an assignment of receivables to comply with the exception, the lender must comply with burdensome notice filing requirements and the assignment must generally occur as part of the financing and prior to the performance of the government contract. This latter requirement creates challenges in the healthcare industry, where claims are generated after services are provided to patients. As a result, financing institutions often utilize the double lockbox structure for all types of healthcare-related governmental receivables.

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Documenting Health Care Finance Transactions and Perfecting Security Interests in Commercial and Governmental Receivables

By N. Paul Coyle and Tracy L. Schovain December 20, 2016 The Journal, ACG Chicago

N. Paul Coyle

Tracy L. Schovain

It is common for lenders to collateralize asset-based, cash flow and real estate loans with, among other items of collateral, commercial and governmental receivables. There are distinct variations of, and risks to the lenders in connection with perfecting liens on such receivables and the various accounts into which each such receivable is deposited. This article summarizes certain issues with respect to perfecting a security interest in both commercial receivables and governmental receivables ( i.e. , health care accounts receivable), provides an overview of the related “bifurcated” lockbox structure and identifies issues in connection with structuring and documenting such health care finance transactions.

Subsets of Health Care Accounts Receivable

Health care accounts receivable are usually classified in one of three categories: governmental collections, commercial collections and self-pay collections. Governmental collections include payments from Medicare, Medicaid, TRICARE and any other governmental health care program (each, a “Governmental Payor”). Commercial collections include payments from commercial health care insurers ( i.e. , Blue Cross/Blue Shield, etc.) (each, a “Commercial Payor”). Self-pay collections include payments from individual patients. A lender may have a perfected security interest in health care accounts receivable regardless of whether the payments are received from Governmental Payors, Commercial Payors or individuals.

Specific Types of Collateral under the Uniform Commercial Code and Related Perfection Issues

Under the Uniform Commercial Code (“UCC”), payments from Governmental Payors are considered “payment intangibles” [which is a subset of the term “general intangible” under Revised Article 9 of the UCC (“Revised Article 9”)] because such payments are disbursed from federal or state trust accounts and are not paid from insurance policies. Accordingly, lenders obtain a perfected security interest in such receivables the same way as such lenders would by perfecting a security interest in other payment intangibles. This is accomplished by filing a financing statement with the office of the Secretary of State from the state of the borrower’s jurisdiction of organization.

Revised Article 9 introduced “health care insurance receivables” as a new type of collateral—a subset of “accounts.” The term “health care insurance receivables” is defined in Revised Article 9 as “an interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for health care goods or services provided.” The defined term “accounts” in Revised Article 9 specifically includes health care insurance receivables. The term “health care insurance receivables” includes payments from Commercial Payors and individuals, but not payments from any Governmental Payor. As with perfection of liens on accounts and general intangibles, a lender may perfect a lien on health care insurance receivables (a subset of accounts) by filing a financing statement with the office of the Secretary of State from the state of the borrower’s jurisdiction of organization.

A lender’s security interest attaches to the cash proceeds of the health care insurance receivables and payment intangibles when the borrower receives payment. A borrower is deemed to have received payment from a Governmental Payor when such payment is deposited in a deposit account in the name, and under the control, of the borrower ( i.e. , any health care provider) (a “Governmental Deposit Account”) and a Commercial Payor when such payment is deposited in a deposit account that may be in either the name of the borrower or in the name of the lender (a “Commercial Deposit Account”).

Although a lender will have a perfected security interest in collections from the Governmental Payors, the Medicare anti-assignment rules—and related federal and state rules affecting Medicaid and other governmental health care programs (collectively, the “Anti- Assignment Rules”)—prohibit such lender from having control over the deposit account (and control over the disposition of funds on deposit in the Governmental Deposit Account) thereby preventing such lender from having a perfected security interest in a Governmental Deposit Account. Under Revised Article 9, a secured party must have “control” over a deposit account to be perfected in such account. Therefore, a lender cannot be perfected in any Governmental Deposit Account [recall, the lender is still perfected in the cash proceeds (payment intangibles) deposited into such account].

A lender is able to mitigate any risk from not having a perfected security interest on the Governmental Deposit Account by complying with the Anti-Assignment Rules and implementing a sweep mechanism ( i.e. , daily). At or shortly after closing of a financing transaction, a borrower will direct certain Governmental Payors to forward payments due to such borrower to a deposit account, which is subject to terms and provisions of a depository agreement by and among the borrower, the lender and the depository bank (the “Governmental Depository Agreement”). The Governmental Depository Agreement should specifically state that: the Governmental Deposit Account shall be subject only to the signing authority of the borrower, the borrower shall have exclusive control of the funds deposited in the Governmental Deposit Account and the depository bank shall be subject only to the borrower’s instructions regarding disposition of the funds in the Governmental Deposit Account. These minimum provisions will satisfy compliance with the Anti-Assignment Rules.

The Governmental Depository Agreement should also contain provisions directing the depository bank to sweep on a periodic basis ( i.e. , daily) the proceeds on deposit in the Governmental Deposit Account to another account over which the lender has control ( i.e. , lender’s account). Because the borrower remains in control of the Governmental Deposit Account, the borrower can rescind any sweep order at any time, and the depository bank must comply with any such order. By reducing the balance in the Governmental Deposit Account to zero each day, any risk of the borrower’s redirecting or diverting funds is minimized. Typically, depository banks have their forms of Governmental Depository Agreements, which include most of the foregoing provisions. In the case of a Commercial Deposit Account, control may be achieved through the execution of a traditional deposit account control agreement (the “Commercial Depository Agreement”) by and among the borrower, the lender and the depository bank. Because these payments are from health care insurance receivables and not payments from Governmental Payors, the borrower and the lender are not subject to the Anti-Assignment Rules, and the lender may have control over the Commercial Deposit Account. As a result of not having to comply with the Anti-Assignment Rules, the Commercial Depository Agreement should provide that: payments from the health care insurance receivables are deposited into the Commercial Deposit Account, which may be in the name of the borrower or the lender; and the lender is in control of the Commercial Deposit Account. As stated above, the lender has a perfected security interest in all funds deposited into the Commercial Deposit Account. In addition, the key element of control exists (even though the borrower may have access to the funds in the Commercial Deposit Account); thus, the lender also has a perfected security interest in the Commercial Deposit Account. Having the Commercial Deposit Account in the name of the lender may also mitigate any risk in any bankruptcy proceeding of any borrower as the account is not property of the borrower—thus, not subject to any stay order of the bankruptcy court.

Regulatory Issues with Various Providers and Related Structuring Issues

In connection with structuring health care finance transactions, particular focus should be on the type of health care provider ( i.e. , the borrower). With asset-based loans, a lender’s focus is with respect to the ownership of the receivable because that receivable will be included in the borrowing base pursuant to which lender will provide loans. These issues arise when considering financing to management services organizations and health care providers subject to the corporate practices of medicine rules in effect in various states. For example, with management services organizations, it is vital to understand whether the receivable included in the borrowing base is the management fee or the underlying receivable from a Governmental Payor. Confirming whether the health care provider actually owns the receivable can be accomplished by reviewing such health care provider’s provider agreement. If the health care provider is a professional corporation owned by physicians and that provider generates the receivable, as long as such physicians assigned all of their rights to such payments and the health care provider generated those receivables using such provider’s provider number, those receivables are considered owned by such provider. Thus, to the extent a lender has a security interest in such receivables, such lender has the right to step into the borrower’s shoes and realize the full value of the receivable, as opposed to a receivable that constitutes a management fee where the lender is only able to realize the value of such management fee.

Similar issues arise in connection with operations transfer agreements and whether the new operator ( i.e. , the borrower) is using such new operator’s provider number to bill and collect the receivables generated at such facility, or whether such new operator is using the old operator’s (the seller’s) provider number to bill and collect such receivables. If the new operator is using the old operator’s provider number, any and all receivables generated using such old operator’s provider number are the property of the old operator. As stated above, in compliance with the Anti-Assignment Rules, Governmental Payors make payments only into accounts in the name of and under the control of the health care provider (here, the old operator). While there may be provisions in an operations transfer agreement to require the old operator to forward such payments to the new operator (the borrower), there are ways to potentially mitigate risks to the new operator.

In order to protect the lender and the new operator in a downside scenario, the operations transfer agreement should provide that in order to secure the old operator’s obligation to forward such payments from Governmental Payors to the new operator ( i.e. , daily), the old operator grants a security interest to the new operator in such receivables generated using the old operator’s provider number. The new operator perfects this security interest by filing a financing statement with the office of the Secretary of State from the state of the old operator’s jurisdiction of organization. The lender, in turn, has this financing statement assigned to the lender. Thus, the lender has an indirect security interest in the receivables generated at the facility using the old operator’s provider number and, to the extent necessary ( i.e. , court order), can direct payment to the lender.

When structuring health care finance transactions, it is essential for the lender to understand the regulatory issues specific to the health care provider, the facts surrounding ownership of certain receivables and how to perfect such lender’s security interest in the various buckets of collateral. As stated above, while lenders may be restricted with respect to certain types of collateral, there are ways to potentially mitigate lender’s risks and avoid being “naked” with respect to certain collateral.

Duane Morris has one of the most experienced and respected health law practices in the United States. Our lawyers counsel leading organizations in every major sector of the industry on the business and regulatory aspects of transactions involving healthcare companies, including M&A; connect clients with sources of capital and potential buyers and sellers of businesses; and provide full- service portfolio company representation, including employment and labor, litigation and other areas. As today’s healthcare providers focus on cost-effective ways to deliver healthcare services, Duane Morris develops innovative and creative ways to help healthcare clients increase their profitability and protect their assets. We tailor our services to specific segments of the industry, including hospitals; physicians; post-acute care, long-term care and senior services; information technology; and mHealth, telemedicine and health information technology.

About the Authors

N. Paul Coyle is a partner in the Chicago office of Duane Morris. Mr. Coyle practices in the area of corporate law with a focus on banking and finance issues, concentrating on commercial finance, banks and work for other institutional lenders, primarily in the health care industry. He negotiates and documents asset-based, cash-flow and real estate financing transactions, including health care receivable financings.

Tracy L. Schovain is an associate in the Chicago office of Duane Morris LLP. Ms. Schovain practices in the area of corporate law with a focus on finance transactions. She represents banks, commercial finance companies and borrowers in a wide variety of transactions, including single-lender and multi-lender commercial finance transactions, senior and mezzanine financing, health care financing and bankruptcy-related workout matters.

By N. Paul Coyle and Tracy L. Schovain

December 20, 2016

The Journal, ACG Chicago

Home > Bank Lending > Health Care Financing: Security Interests in Deposit Accounts containing Medicare/Medicaid Receivables

Health Care Financing: Security Interests in Deposit Accounts containing Medicare/Medicaid Receivables

Lenders making secured loans to health care providers with Medicare and Medicaid receivables should be aware of limitations on their ability to perfect security interests in such borrowers’ deposit accounts. Secured lenders may perfect security interests in their borrowers’ accounts receivable (and identifiable cash proceeds therefrom) by filing UCC financing statements, but when proceeds of those accounts receivable are received by borrowers and deposited into borrowers’ deposit accounts, security interests in the deposit accounts themselves can be perfected only by obtaining "control" over the deposit accounts pursuant to § 9-104(2) of the UCC. In order to perfect such security interests in deposit accounts, revolving credit facilities are, therefore, typically subject to deposit account control agreements. In a deposit account control agreement, the borrower, the secured lender and the depository bank agree that the depository bank will comply with instructions from the secured lender directing disposition of the funds in the deposit account, without further consent by the borrower. This arrangement enables the secured lender to obtain control over the deposit account, thereby perfecting its security interest in the deposit account pursuant to UCC §9-312(b).

Loans to health care providers who receive Medicare and Medicaid payments, however, pose special problems for secured lenders seeking to perfect their security interests in deposit accounts. Medicare/ Medicaid anti-assignment regulations provide that no payment to be made to a provider of services under Medicare may be made to any other person under assignment (42 U.S.C. 1395g(c)) and no payment for any care or service provided under Medicaid to an individual may be made to anyone under assignment other than such individual or the person or institution providing such care or service (42 U.S.C. 1396a (32)). According to the Centers for Medicare and Medicaid Services (CMS) Intermediary Manual §3488.2, payments due to a provider of services may be sent to a bank for deposit in the provider’s account, but only if the check is in the name of the provider and the provider certifies that: (i) "the bank is neither providing financing to the provider nor acting on behalf of another party in connection with the provision of such financing," and (ii) "the provider has sole control of the account, and the bank is subject only to the provider’s instructions regarding the account." This means that any instruction given by a borrower who is a health care provider to its depository bank to transfer funds from the borrower’s deposit account, in which Medicare and Medicaid payments are deposited, to the account of its secured lender must be revocable by the borrower. Because the depository bank must be subject only to the borrower’s instructions regarding the deposit account, it cannot also be subject to instructions from the secured lender, and an arrangement satisfying the Medicare/Medicaid anti-assignment regulations, therefore, cannot give a secured lender "control" of the provider’s deposit account under UCC §9-104.

Many secured lenders find a partial solution to this perfection problem through the use of an arrangement commonly referred to as a "Double Lockbox." In a Double Lockbox arrangement, the health care provider borrower, secured lender, and depository bank enter into a revocable control agreement in which the borrower gives revocable instructions to the depository bank to transfer funds received in the borrower’s Medicare/Medicaid deposit account to an account held by the secured lender on a daily basis. Because the borrower’s instructions are revocable, a Double Lockbox arrangement is permissible under the Medicare/Medicaid anti-assignment regulations. Although it does not perfect the secured lender’s security interest in the borrower’s Medicare/Medicaid deposit account, the daily transfer of funds allows the secured lender to diligently monitor the deposit account and become aware if no funds are being swept, providing the best outcome available without violating the anti-assignment regulations.

Depository banks must be subject only to health care providers’ instructions regarding deposit accounts containing Medicaid/Medicare receivables, so any deposit accounts of health care provider borrowers that contain only receivables from commercial insurers or other non-Medicare/Medicaid sources may be subject to traditional deposit account control agreements. If a borrower maintains such a non-Medicare/Medicaid deposit account, its revocable control agreement may provide that the depository bank transfer the funds received in the borrower’s Medicare/Medicaid deposit account to its non-Medicare/Medicaid deposit account, which is subject to a control agreement perfecting the secured lender’s security interest, rather than to an account held by the secured lender.

404 Not found

42 CFR § 424.80 - Prohibition of reassignment of claims by suppliers.

(a) Basic prohibition. Except as specified in paragraph (b) of this section, Medicare does not pay amounts that are due a supplier under an assignment to any other person under reassignment, power of attorney , or any other direct arrangement. Nothing in this section alters a party's obligations under the anti-kickback statute (section 1128B(b) of the Act), the physician self-referral prohibition (section 1877 of the Act), the rules regarding physician billing for purchased diagnostic tests ( § 414.50 of this chapter), the rules regarding payment for services and supplies incident to a physician 's professional services ( § 410.26 of this chapter), or any other applicable Medicare laws, rules, or regulations.

(b) Exceptions to the basic rule —(1) Payment to employer. Medicare may pay the supplier 's employer if the supplier is required, as a condition of employment, to turn over to the employer the fees for his or her services.

(2) Payment to an entity under a contractual arrangement. Medicare may pay an entity enrolled in the Medicare program if there is a contractual arrangement between the entity and the supplier under which the entity bills for the supplier 's services, subject to the provisions of paragraph (d) of this section.

(3) Payment to a government agency or entity. Subject to the requirements of the Assignment of Claims Act ( 31 U.S.C. 3727 ), Medicare may pay a government agency or entity under a reassignment by the supplier .

(4) Payment under a reassignment established by court order. Medicare may pay under a reassignment established by, or in accordance with, the order of a court competent jurisdiction, if the reassignment meets the conditions set forth in § 424.90 .

(5) Payment to an agent. Medicare may pay an agent who furnishes billing and collection services to the supplier , or to the employer, facility , or system specified in paragraphs (b) (1), (2) and (3) of this section, if the conditions of § 424.73(b)(3) for payment to a provider's agent are met by the agent of the supplier or of the employer, facility , or system. Payment to an agent will always be made in the name of the supplier or the employer, facility , or system.

(c) Rules applicable to an employer or entity. An employer or entity that may receive payment under paragraph (b)(1) or (b)(2) of this section is considered the supplier of those services for purposes of subparts C, D, and E of this part, subject to the provisions of paragraph (d) of this section.

(d) Reassignment to an entity under an employer-employee relationship or under a contractual arrangement: Conditions and limitations —(1) Liability of the parties. An entity enrolled in the Medicare program that receives payment under a contractual arrangement under paragraph (b)(2) of this section and the supplier that otherwise receives payment are jointly and severally responsible for any Medicare overpayment to that entity .

(2) Access to records. The supplier who furnishes the service has unrestricted access to claims submitted by an entity for services provided by that supplier . This paragraph applies irrespective of whether the supplier is an employee or whether the service is provided under a contractual arrangement. If an entity refuses to provide, upon request, the billing information to the supplier performing the service, the entity 's right to receive reassigned benefits may be revoked under § 424.82(c)(3) .

(3) Reassignment of the technical or professional component of a diagnostic test. If a physician or other supplier bills for the technical or professional component of a diagnostic test covered under section 1861(s)(3) of the Act and paid for under part 414 of this chapter (other than clinical diagnostic laboratory tests paid under section 1833(a)(2)(D) of the Act , which are subject to the special rules set forth in section 1833(h)(5)(A) of the Act) following a reassignment from a physician or other supplier who performed the technical or professional component, the amount payable to the billing physician or other supplier may be subject to the limits specified in § 414.50 of this chapter.

Healthcare Insurance Receivables and Accounts as Collateral — A Plain English Explanation for Lenders

Introduction.

Lenders that extend credit to healthcare companies and providers often include healthcare insurance receivables and healthcare-related accounts in the borrowing base that determines a lending amount. As with all collateral, the lender wants to be secured, perfected and first in priority on these healthcare insurance receivables. Additionally, should the borrower default, the lender wants to be able to foreclose on the collateral and realize its value as payment for the loan.

This article reviews the issues related to extending credit secured by a lien on healthcare insurance receivables and the differences between an account, where the account debtor is the government (i.e., on behalf of the Medicare program), and an account where the account debtor is a private party.

Security Interest in Accounts

Lenders routinely take a lien on accounts as part of the collateral package securing a loan. Pursuant to the Uniform Commercial Code (UCC), healthcare insurance receivables are a subset of accounts and considered the same as accounts with respect to the method by which a secured lender obtains a perfected security interest. The borrower or any other person whose property secures the loan will grant the lender a security interest in its accounts (which includes healthcare insurance receivables). This grant of a security interest, and the giving of value by the lender, makes the lender secured and gives it some rights in the collateral.

Additionally, the lender will want to perfect its security interest by filing a financing statement describing the collateral in the jurisdiction where the borrower, or other person granting the security interest (such as a guarantor), is located. The filing of the financing statement perfects the lender’s security interest in the account, and gives the lender priority over any unsecured creditors and any secured creditors that have not perfected.

Being a perfected secured creditor is only part of the battle for a lender. Equally important for a lender is its ability to collect the proceeds of any of the accounts, if necessary. In addition to a lien in the accounts, the lender will also take a lien on, among other things, the cash and deposit accounts where the cash proceeds are deposited when the accounts are paid.

The secured lender must have “control” of the deposit account in order to perfect a security interest in the deposit account and the money in the deposit account. Control exists if: i.) the secured lender is the depository bank at which the debtor maintains its deposit account; ii.) the secured lender becomes the depository bank’s customer with respect to the deposit account; or iii.) the secured lender enters into a deposit account control agreement with the depository bank. A deposit account control agreement is signed by the debtor, secured lender and the depository bank, and provides that the secured lender will have control of the account by virtue of the depository bank agreeing to take instructions from the lender without obtaining consent from the debtor.

Security Interest in Healthcare Insurance Receivables and Medicare Accounts

A security interest in a healthcare insurance receivable can be perfected through the filing of a financing statement. Deposit accounts, where proceeds from healthcare insurance receivables and accounts are deposited, can be perfected through control over such deposit accounts. However, federal laws require that government healthcare accounts, including Medicare and Medicaid, be treated differently from private healthcare insurance receivable accounts in certain ways. As a result, secured lenders must take certain additional steps to protect their collateral or consider limiting the amount of government healthcare accounts that are included in their borrowing base.

Private Health Insurance Accounts

A lender may perfect a security interest in non-government healthcare accounts (i.e., private pay insurance) and the applicable deposit account, where the account payments are deposited, in the same fashion as the process regarding the accounts and deposit accounts discussed previously. In the case of healthcare insurance receivables and accounts, the security interest of the lender attaches to the cash proceeds of such accounts, when the debtor receives the payment. The cash proceeds of the healthcare insurance receivables and accounts should not be commingled with other funds and should remain identifiable in order to perfect a security interest in such cash proceeds.

When a secured lender perfects a security interest in the healthcare insurance receivables and accounts, the secured lender has a right to notify the account debtors to directly make payments to the secured lender if the debtor defaults. Even if the provider agreement between the healthcare provider and the heath insurance company, as the account debtor, restricts assignment of the healthcare insurance receivables, the UCC provides that the grant, attachment and perfection of a security interest in the account does not result in a default under the provider agreement.

Exhibit 1 reflects the typical secured private pay account structure.

Medicare Accounts

Medicare accounts, as well as the accounts of other government healthcare programs, are subject to anti-assignment rules. These anti-assignment rules prohibit a healthcare provider from assigning its right to payment for services to any person other than the provider. A violation of the anti-assignment rules could result in termination of the healthcare provider’s participation in Medicare or other government programs. Thus the lender may be secured and perfected in the account under the UCC, but it may have practical issues with collecting the cash proceeds, because the lender cannot be paid directly from the government.

In particular, the healthcare provider’s deposit account where Medicare payments are made can only be in the name of the provider, and only the provider is allowed to provide instructions with regard to the account. With Medicare accounts, the debtor will retain the ultimate right to direct the payments of funds into and out of the deposit account. Although a lender cannot have control over the debtor’s initial deposit account containing proceeds of Medicare accounts, the depository bank, secured lender and debtor may sign an agreement, pursuant to which the depository bank agrees to notify the lender if the debtor rescinds the sweep order.

However, if a secured lender perfects a security interest in the Medicare accounts themselves, then the secured lender is perfected in the identifiable cash proceeds of those receivables. As a result, once Medicare makes a payment to a provider, and that payment is deposited in the provider’s account, the secured lender’s security interest is perfected in the cash proceeds for 20 days, despite the fact that the secured lender cannot control the deposit account. It is recommended that the lender require a healthcare provider debtor to deposit its Medicare reimbursement proceeds into a deposit account separate from the non-government healthcare insurance receivables deposit account — in order for the proceeds to remain identifiable. Additionally, the loan documentation should contain covenants that prohibit commingling.

The secured lender will want to obtain control over those Medicare payments by, as quickly as possible, moving the payments into a deposit account subject to the lender’s control. In order to do this, the funds should be swept regularly from the debtor’s deposit account into a deposit account subject to the lender’s control. This is referred to as a “double lockbox arrangement.”

In the double lockbox arrangement, there are some circumstances to keep in mind. The debtor continues to control the initial deposit account and can rescind the sweep order and withdraw money from the initial deposit account at any time. In addition, if the debtor files bankruptcy, the funds may become trapped in the initial account, as the sweeping mechanism may be stayed. As a result, the secured lender should require that the account be swept on at least a daily basis in order to avoid cash proceeds accumulating.

Exhibit 2 reflects the typical Medicare or government pay account structure.

Case Law Interpretation of Anti-Assignment Rules

If the debtor defaults on a loan, federal law preempts non-judicial enforcement of a security interest in government healthcare accounts. However, the Medicare statutes provide for a judicial remedy in order to obtain assignment of the Medicare payments. A secured lender must file suit to enforce its security agreement, and a judge may issue an order assigning the right to Medicare payments to a third party. Such court order, when filed with Medicare, is not a violation of the anti-assignment rules. However, the courts have inconsistently interpreted the Medicare anti-assignment provisions. Some courts provide a flexible interpretation of the anti-assignment provisions and others are stricter.

In Missionary Baptist v. First National Bank , the Fifth Circuit upheld an arrangement where the bank took a security interest in Medicare and Medicaid accounts and, by agreement, received direct payment of the accounts. The Fifth Circuit held that this did not violate the anti-assignment rules. Missionary Baptist is the foundation for several cases, which conclude that the anti-assignment rules were not intended to invalidate security interests in Medicare and Medicaid receivables, so long as the provider has control over the initial payment from the government.

In DFS Secured Healthcare Receivables Trust v. Caregivers Great Lakes, Inc ., the Seventh Circuit discussed the history behind the anti-assignment rules, finding that “nothing suggests that Congress intended to prevent healthcare providers from assigning receivables to a non-provider.” In fact, the court noted that in this case, Medicare was aware of the assignment of healthcare accounts between the provider and a non-provider third party, and that there was no evidence of any disapproval of the assignment.

In the case, In re Nuclear Imaging , the court discussed the double-lockbox arrangement, but stressed that the secured lender has no legal right on its own to demand payment from the government. Once a default situation arises, the secured lender cannot directly obtain payment from the government and will only have a security interest in the payments that have already been swept into the deposit account it controls.

However, in Credit Recovery Systems, LLC v. Hieke , the District Court for the Eastern District of Virginia struck down an agreement assigning the right to file Medicare and Medicaid claims for direct payment from the government. In that case, a clinic pledged its Medicare and Medicaid accounts as collateral and, when the clinic defaulted on the loan, the lender took possession of the assets and sold the accounts to Credit Recovery Systems.

The clinic later entered a settlement agreement with the government, whereby it agreed to abandon its rights to unpaid Medicare and Medicaid claims. Credit Recovery Systems filed an action seeking declaratory judgment that the assignment was valid, so it could file a claim with the government for the Medicare and Medicaid claims. The court held that the right to receive direct payments from the government cannot be assigned. This ruling effectively prevents a secured lender from exercising its remedies without a court order.

With certain precautions, a secured lender can include healthcare insurance receivables and accounts as collateral for a loan. In general, private healthcare insurance receivables are treated in the same manner as other accounts under the UCC. The process of collateralizing government healthcare accounts is more risky due to federal anti-assignment provisions. This risk can be mitigated with i.) a double lockbox arrangement with a daily sweep feature, ii.) a deposit account control agreement, iii.) a reduction of available credit, and/or iv.) exclusion of such receivables from the borrowing base.

Cheryl Camin is a shareholder in Winstead’s Healthcare Industry Group as well as the Corporate Securities/Mergers & Acquisitions Practice Group. Her practice focuses on healthcare matters, advising providers and businesses on entity formation and structural, contractual and regulatory healthcare issues. She can be reached by e-mail at: [email protected].

John Holman Jr. is a member of Winstead’s Finance & Banking Practice Group. He represents lenders and administrative agents in secured and unsecured debt financings and purchasers of debt. His transactions have included credit facilities for insurance holding companies, oil and gas companies, and commercial and residential construction and art-secured loans. He can be reached by e-mail at: [email protected].

Elaine Flores is an associate in Finance & Banking Practice Group. She can be reached by e-mail at: [email protected].

Disclaimer: Content contained within this article provides information on general legal issues and is not intended to provide advice on any specific legal matter or factual situation. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel.

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Healthcare Financing Anti-assignment Limitations
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