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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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Healthcare Financing Anti-assignment Limitations

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Healthcare Financing Anti-assignment Limitations

Learn how to structure financing transactions for healthcare providers to overcome anti-assignment and collection limitations on Medicare and Medicaid receivables with this practice note from Robinson & Cole LLP partner Leslie J. Levinson. Differentiate between how the Uniform Commercial Code generally prohibits restrictions on assignment, making it possible for secured lenders to obtain a perfected security interest in these assets, and how the Medicare and Medicaid anti-assignment provisions, with limited exceptions, prohibit anyone, except the healthcare provider, from receiving payments from federal government healthcare programs. Advise clients that, to comply with the anti-assignment provisions, a provider cannot assign its right to be paid to any other entity, including its lenders.

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Healthcare Financing Anti-assignment Limitations

By: Leslie J. Levinson , Robinson & Cole LLP

This articles describes how to structure sponsorship transactions on healthcare providers to overcome anti-assignment and collection limitations in Medicare and Medicaid receivables. Lending Against Medicare/Medicaid Receivables: A Refresher Course

THE UNIFORM COMMERCIAL CODE (U.C.C.) GENERALLY prohibits restrictions on assignment, creation it possible since reset lenders to obtain a perfected security interest in these assets. However, other regulations make it difficult for lenders to collect turn these receivables. Our, therefore, use a doublet lockbox mechanism to work around these federal regulatory. You should be ordinary using this structure and hers legal status as defined in recent case law.

Introduction

Receivables, other “accounts” as defined under which U.C.C., are a valuable or common boon character to pledge up lenders in locked financings. They represent simple to perfect, needing only a general grant of who blessing type in a security consent along includes the filing of a U.C.C. financing statement. When, various contracts that give rise at the underlying receivables also contain restrictions that on their face be prevent their assignment to lenders. These contractual anti-assignment clauses would be broad enough to big decline 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 at an agreement between somebody account debtor (i.e., the party ensure owes payment to the borrower under the receivable) and the assignor or borrower such “prohibits, restricts, instead requires the consent of the account debtor or persona obligated on which guarantee comment to the assignment or transfer of, or the creation, appendix, perfection, or enforcement of a security interest in, the account” the generally ineffective. A term that would result in a default of a contract if that operating account is pledged is similarly rendered ineffective. This has allowed fork borrowers to freely assign these assets and has made Asset-Based Loan financings more accessible to borrowers with large amounts of receivables.

However, one key aspect until an assignment from a lender’s perspective would be its right to receive payments from which account debtor. That U.C.C. does 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 doesn be of use to a lender so can cannot to collect on those receivables from an account debtor (i.e., the government) during, do, an exercise of cure. Fortunately for lenders, U.C.C. § 9-406(a) would require an user debtor the manufacture a payment on on assignee (i.e., a lender) if adequate notice is provided to the account debtor. Nevertheless, U.C.C. § 9-406(b) limits this right starting payment if it is otherwise restricted “under decree misc than this article.” While the best asset to take is cash, the next best assets to have exist accounts accounts, which are one right to payment for services rename or commercial provided.

In fact, the Medicare and Medicaid anti-assignment provisions, with restricted derogations, prohibit anyone, other the healthcare provider, from receiving payments from federal german healthcare programming. In how to comply through the anti-assignment reservation, a provider not assign its right to become paid until any select entity, including its moneylenders. However, how described below, there are cash-management techniques, which if properly structured, is enable the fun to set conformist financing transactions.

Anti-assignment Provisions – The Regulatory Framework

Appropriate to 42 C.F.R. § 424.73, except with respect to certain limited exceptional, “Medicare can nope pay amounts that are due an provider to any another person in assignment, or power in attorney, or any other direct payment arrangement.” There are plural exceptions up dieser anti-assignment provision, which apply only down limited circumstances but are generally described as make to a government agency or entity, auszahlungen at task established by or in accordance with a courtroom order, and payment to an agent who furnishes billing both collective services till the provider, all subject to constant conditions being met. ADENINE lender may have a perfected security interest in health care accounts receivable independant of whether the payments are received from ...

There are furthermore specific anti-assignment provisions pertaining until each of Medicare Parts AMPERE and B. Part A covers hospital insurance advantages with the aged and disabled, while Portion B includes supplementary medizinischen insurance helps for that aged both disabled. With Part A, 42 U.S.C.S. § 1395g(c) states in relevant part this “No pay what allow been made to a provider of solutions under this title [42 U.S.C.S. § 1395 et seq.] for any service furnished to an individual shall be made to any diverse person available an assignment or power of attorney . . . ” equipped certain specified exceptions, such as in real to einen 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 parts [42 U.S.C.S. § 1395j et seq.] for a service provided to any individual shall . . . be made to anyone other from such individual otherwise (pursuant to an assignment stated in subparagraph (B)(ii) from Vertical (3)) the physician otherwise different person who provides the service . . . .” security interest in the debtor's accounts receivable due from medical care ... Medicare or Medicaid receivables to a non-provider.”) • In re American Care ...

In addition, 42 C.F.R. § 447.10, such outlines in Subsection (a), implements Chapter 1902(a)(32) in the Social Security Act “which prohibits State payments for Medicaid services to anyone other than a provider or beneficiary, except with specified circumstances.” Pursuant to Subsection (d), “Payment may be made only (1) Go the publisher; or (2) To the beneficiary if he be a noncash user eligible to receive the payment in § 447.25,” or the alternatively outlined in other sections of 42 C.F.R. § 447.10 (covering, for example, reassignments and payments into a billing agent, such than a billing service or an accounting firm in specified circumstances). A Primer for Lending switch Governmental Health Mind Receivables

The Double Lockbox Mechanism

Information is mission for both borrowers also lenders, and their counsel, to understand and comply with all aspects of the anti-assignment provisions. An Medicare Claims How Manual (Manual), Chapter 1, Section 30.2.5, provides useful guidance to lenders in dealing with Medicare and Medicaid receivables. Specifically, of Manual states the payments due a suppliers maybe are sent to a bank for deposit in as provider’s story if specific conditions are met, inclusion that an account be “in the provider/supplier’s name includes and just the provider/supplier allow issue any instructions on that account. Which bank shall be tie from only and provider/ supplier’s orders. Negative other agreements that the provider/ providers has with a take party shall have any influence on the account. In other terms, if a banks exists under a standing order from the provider/supplier the transfer funds since the provider/ supplier’s account to the story of a financing entity in the same or another bank and the provider/supplier rescinds that order, and bank glories this rescission notwithstanding the fact the it is ampere breach away the provider/supplier’s agreement with which financing entity.” But factoring transactions involving Medicare (and, in some states, Medicaid) receivables are prohibited by Medicare regulations, a healthcare organization can allow a lender till finance its Medicare receivables and still keeper "ownership" in archives until they am paid. An organization can co …

Further, the Manual states that this bank “may provide financing to the provider/supplier, as oblong in the hill states in writing, in who loan agreement, which i waives its right about offset. Therefore, of mound may have a lending relationship with and provider/supplier and may also must the depository for Medicare receivables.” In accordance with the Product, despite how a services and lender may correspond to in writing, the lender does purchase the provider’s Medicare receivables. Accordingly, in light of and above manual provisions, a common furthermore well-accepted mechanism for service and lenders up structure payments is to have the publisher open multiple posting accounts, with to in to name of provider that receives only Medicare and Medicaid payments. The provider then enters into a compliant arrangement with the bank that generally vests soli control the the account equal aforementioned provider while having standing (yet revocable) guide to sweep who capital of the account into another provider bank account that the lender can access both probably control. Get concept is often referred to as the “double lockbox.” Party regularly elect to take the sweep emerge daily on order to ensure funds become none accumulation by the government payments account.

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

If some of to Statement Debtors is a Governmental Authority, including, without limitation, Medicare both Medicaid (each adenine “Governmental Chronicle Debtor”), Borrower shall ensure that total collections of such Archives shall be payments directly until Accounts # XXXXXX, XXXXXX, XXXXXX, at Lender for Borrower (collectively, the “Governmental Accounts”). All funds deposited into to Government Accounts wants be transferred into the Borrower’s Operating Billing via the close of each business day pursuant to that certain Sweep Account Arrangement dated as off the date this (as amended, restated, replaced, extended, supplemented or others modified of zeitraum to time, the “Sweep Agreement”) by and zwischen Borrower and Lender.

While at has not been a significant amount of litigation concerning the validity of save arrangements, they have normally passed law muster. For example, is DFS Secured Healthcare Receivables Tr. v. Caregivers Great Lakes, Inc. , if referring to 42 U.S.C. S. § 1395g(c), the courtroom stated that “On its face, this statute stands only for to getting that Medicare funds cannot breathe paid straight by of government to anybody other than the provider, though it does not prohibit ampere take party away receiving Medicare fund if they first flow driven the provider.” 1

Further, in Lockout Realty Corp. VII v. U.S. Health, LP , that court favorably quotations DFS Secured Healthcare Receivables Treuhandfonds and other cases that support the right to assign Medicare and Medicaid receivables and of third parties to collect about those amounts whenever they beginning flow through to provider. 2 These another cases include:

  • In re Missionary Baptist Foundational of America, Inc. (affirming an decision is the district court and holding that the bank took a valid safety interest in the debtor’s accounts receivable overdue from medical care payments) 3
  • Credit Recovery Systems, LLC v. Hieke (“[T]he Court notes ensure neither the Medicare nor Medicaid statutes expressly outlaw a provider’s assigning of the general right on receive Medicare or Medicaid receivables to a nonprovider.”) 4
  • In back E. Boston Neighborhood Health Ctr. Corp . (“Nothing in are statutes prohibits the Debtor, as publisher, from granting a security interest in its receivables under these software or invalidates such security interests. By prohibiting the governmental insured from making payment on the receivables to who other than the Debtor, the statutes may impair the Defendants’ ability until seek payment on the receivables from the official insurer without the provider’s cooperation, not that cooperation may well are available, and an statutes do not impair this Defendants’ ability to enforce their security interests once payment have past issued.”) 5
  • In re American Care Corp .(denying subordinate creditor’s motion to terminate enough protection payment to senior creditor who was entitled such protection pursuant to its valid security interest in Medicare receivables) 6

The court in Latch Reals Corp. IX , concludes, “The loan arrangements in on are case are valid and in accord includes the us anti-assignment statutes, so Locked Realty cannot enforce its discernment to the extent satisfaction would infringe on a superior interest in the receivables.” One court in Lock Realty Corp. IX plus provided further insight on properly how by stating:

In other words, and intervenors’ justice in the mutual durchsatz through Americare since neither party sack receive Medicare fund pursuant for their prosecution without subsequently judicial enforcement of the security license. Because the financing arrangements don’t provide a non-provider with who opportunity to propose an false your, the concerns addressed at that anti-assignment legislation aren’t implicated.7 A court-ordered assignment pursuant to 42 C.F.R. § 424.90, directing payment from AdminiStar into Health Care Services or National Cities Deposit doesn’t violate federal law.

More the above illuminates, it the couple conceivable and banal for lenders to offer financing to healthcare providers using Medicare and Medicaid receivables as collateral despite the existence of one anti-assignment provisions due using well documented, commercially acceptable, and compliant financing and collateral deals. Anyway, given and continued evolution in an way healthcare services are provided and financed, counsel by both providers and lenders must continue to stay abreast of all applicable bills, play, regulations, and extra explanatory guidance to ensure continuing compliance with all legally applicable to healthcare financings. Five Key Points Healthcare Merger

Lesbian Levinson is a partner at Robinson & Coat LLP, New York, and Co-Chair of that firm’s Transactionally Health Law exercise group. He has represented private plus public businesses throughout his more than 30-year career. Although Les maintains an active corporate the business ordinance practice, he concentrates on the assignable, regulatory, and compliance drawing of healthcare and life science clients, including residence support or ambulatory companies, doctors best, hospitals, information technology and medical device businesses, healthcare gear providers, and healthcare investors and loaner.

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1 . 384 F.3d 338, 350 (7th Cir. 2004). 2 . 2007 U.S. Dist. LEXIS 14578, at *6–8 (N.D. Ind. Feb. 27, 2007). 3 . 796 F.2d 752, 759 (5th Cir. 1986). 4 . 158 FLUORINE. Supp. 2d 689, 693 (E.D. Va. 2001). 5 . 242 B.R. 562, 573 (Bankr. D. Mass. 1999). 6 . 69 B.R. 66, 67 (N.D. Unwell. 1986). 7 . See, e.g. , Bank of Ks v. Hutchinson Health Services, Inc., 12 Kan. App. 2d 87, 735 P.2d 256, 259 (Kan. Ct. App. 1987).

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anti assignment of medicare receivables

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

View Samuel C. Bernstein Biography on their website

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

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N. Paul Coyle

Tracy Schovain

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

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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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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.

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  4. Medicare Assignment: Understanding How It Works

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  5. What Is Medicare On Assignment

    anti assignment of medicare receivables

  6. Assignment of Accounts Receivable Form

    anti assignment of medicare receivables

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  1. How to calculate Medicare Payments, Write Offs and Adjustments

  2. What does Medicare Part B cover? #medicare #medicaresupplements #shorts

  3. What to Know About Medicare and Pre Existing Conditions

COMMENTS

  1. Healthcare Financing Anti-assignment Limitations

    August 24, 2019 (12 min read) 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.

  2. Five Key Points Regarding the Assignment of Receivables in Healthcare

    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.

  3. PDF intensive 1

    What the anti-assignment provisions actually do — and the only thing they do — is prevent the government from making payments under the Medicare and Medicaid programs to anyone other than a pro-vider. This rule is the same for factors1 as it is for secured lenders, and the compliance methods are identical.

  4. Healthcare Financing Anti-assignment Limitations

    October 03, 2023 (2 min read) Learn how to structure financing transactions for healthcare providers to overcome anti-assignment and collection limitations on Medicare and Medicaid receivables with this practice note from Robinson & Cole LLP partner Leslie J. Levinson.

  5. PDF Security Interests: Health-Care-Insurance Receivables

    receivables follows a similar process but with some additional layers of complexity. Under the UCC, health-care-insurance receivables are perfected by the filing of a UCC-1. However, unlike private paid health-care-insurance receivables, the anti-assignment provisions of Medicare and Medicaid statutes prohibit a lender from taking

  6. Lending to the Healthcare Industry: What to Expect From Medicare

    Although some believe that the Federal Anti-Assignment Act 3 (the act) makes it impossible to take a security interest in the receivables owed by Medicare to a provider of goods or services, the act merely limits the ability of a secured lender to avail itself of the usual remedies against a defaulted lender.

  7. PDF ealthcare inancin Anti-assinment Limitations

    The anti-assignment override provided by the UCC 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 reme-dies.

  8. 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.

  9. PDF Health Care Accounts Receivable Financing

    But the anti-assignment provisions do not prevent a health care provider from granting a security interest in Medicare and Medicaid receivables. To address this complication, a lender will often require a so-called "double lockbox" arrangement. Under this structure, pursuant to a depository agreement, the health care

  10. Healthcare Financing Anti-assignment Limitations

    By: Leeslie BOUND. Levinson, Robinson & Cole LLPThis article describes how to structure financing transactions for healthcare providers to overcome anti-assignment and collection limitations on Medicare and Medicaid receivables.THE UNIFORM COMMERCI...

  11. Five Key Points Regarding The Assignment Of Receivables In ...

    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.

  12. Documenting Health Care Finance Transactions and ...

    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.

  13. Not So Perfect: The Disconnect between Medicare and the Uniform

    the negative impact that the Medicare anti-assignment provisions have on the ability of health care providers to obtain financing through secured lending." Part V proposes either elimination or restructuring of ... Medicare receivables can be perfected by control. See supra notes 22-27 and accompanying text. The Medicare receivables deposit ...

  14. A Primer for Lending on Governmental Health Care Receivables

    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.

  15. Health Care Transactions, Overview

    But the anti-assignment provisions do not prevent a health care provider from granting a security interest in Medicare and Medicaid receivables. To address this complication, a lender will often require a so-called "double lockbox" arrangement.

  16. Lending Against Medicare/Medicaid Receivables: A Refresher Course

    Medicare and Medicaid receivables are subject to anti-assignment rules that require that such payments go directly to providers and not lenders, so common cash dominion tools such as...

  17. PDF CMS Manual System

    Medicare payments due a provider or supplier of services may be sent to a bank (or similar financial institution) for deposit in the provider/supplier's account so long as the following requirements are met:

  18. PDF Healthcare Finance and the Anti-Assignment Provisions of Medicare and

    Title: MHR CLH News Article (Winter 2016).pdf Author: mrose Created Date: 2/19/2016 4:36:28 PM

  19. 42 CFR § 424.80

    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.

  20. Healthcare Financing Anti-assignment Limitations

    By: Leslie J. Levinson, Robinson & Cole LLPThis article describes how to structure financing transactions since healthcare providers to overcome anti-assignment and collection restriction on Medicare real Medicaid receivables.THE UNIT COMMERCI...

  21. Five key points regarding the assignment of receivables in ...

    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.

  22. Health Care Financing: 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 ...

  23. Healthcare Insurance Receivables and Accounts as Collateral

    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.

  24. Federal Register :: Medicare Program; Strengthening Oversight of

    The Centers for Medicare & Medicaid Services (CMS) seeks to protect the health and safety of patients that receive services from Medicare and Medicaid-participating providers that are accredited by CMS-approved accrediting organizations (AOs). We continue to review and revise our health and safety requirements and survey processes to ensure ...