Healthcare Providers and Government Receivables
Ernest A. Goetz, Jr. and Kenneth A. Hoffmann
In servicing healthcare providers, banks need to understand the impact of federal “anti-assignment regulations which apply to Medicare and Medicaid accounts receivable (hereafter, “M & M Payments). Subject to certain exceptions, M & M Payments may only be made to the healthcare provider that furnished the services and accepted assignment of the patient’s claim. Payment is considered to be made when paid into a deposit account controlled by the provider or the patient. M & M Payments may not be made into an account under the control of a lender. In addition, the relevant regulations of the Centers for Medicare and Medicaid Services (“CMS) prohibit banks from offsetting against deposits of M & M Payments.
II. Bank as Lender
Interestingly, the anti-assignment provisions do not prohibit a bank from making a loan collateralized by a security interest in the M & M Payments and the cash proceeds of the M & M Payments. However, the security interest in cash proceeds is limited to cash that is identifiable and not comingled with other funds of the provider. To avoid the problems of cash identification, most banks utilize a “double lockbox structure to secure such a loan and comply with federal regulations.
The bank, acting as both lender and depository, would secure its loan with a lien upon accounts receivable, proceeds and deposit accounts (among other things). The properly structured “double lockbox allows for initial deposit of the M & M Payments in an account with the bank under the healthcare provider’s ownership and sole control (the “Initial Account). The Initial Account should be excluded from the grant of the bank’s security interest and should not be subject to offset by the bank. Payments from private patients, non-governmental health insurers, etc. should be deposited in a second account with the bank subject to the bank’s security interest and controlled by the bank (the “Blocked Account).
Funds in the Initial Account (constituting the proceeds of the M & M Payments), would then be swept daily into the Blocked Account (which is subject to the bank’s lien) pursuant to the provider’s standing instructions. A sweep into the Blocked Account is permitted as long as the provider has authority to discontinue the sweep. However, the Bank’s loan documents may provide that such a revocation of the sweep constitutes a default under the loan. As M & M Payment claims may be “assigned pursuant to court order, the bank’s loan documents should further permit the bank to seek such a court order after default, directing that all future M & M Payments be made to the Blocked Account, and to direct all government payers to make payments into the Blocked Account.
III. Bank as Depository
The Initial Account must be in the healthcare provider’s name only, and only the provider may issue revocable instructions with respect to that account. As depository, the bank is obligated to follow instructions from the healthcare provider with respect to such Initial Account, notwithstanding any agreement the provider may have with a third party. Collection account agreements for the bank’s benefit, or for the benefit of third-party lenders, are prohibited by CMS regulations for Initial Accounts. Therefore, if the Bank has standing instructions to transfer funds from the provider’s Initial Account to a third-party lender, and the provider rescinds such instructions, the bank must honor the rescission even if it breaches the provider’s agreement with the third-party lender. It should be noted that as part of the Medicare enrollment process, healthcare providers are required to obtain waivers of the right of offset from the financial institutions which maintain their Initial Accounts. For this reason, a depository bank should always require a second account dedicated to other payments not subject to the offset waiver.
Federal regulations impose additional requirements upon banks servicing healthcare providers. Depositories need to understand the restrictions upon Initial Accounts. The double lockbox structure complies with anti-assignment requirements and allows for lenders to secure their loans with liens on M & M Payments and realize directly on the cash proceeds of the M & M Payments.
*This article originally appeared in the Winter 2014 issue of Certilman Balin’s Banking News.
§ 447.10 Prohibition against reassignment of provider claims.
(a)Basis and purpose. This section implements section 1902(a)(32) of the Act which prohibits Statepayments for Medicaid services to anyone other than a provider or beneficiary, except in specified circumstances.
(b)Definitions. For purposes of this section:
Facility means an institution that furnishes health care services to inpatients.
Factor means an individual or an organization, such as a collection agency or service bureau, that advances money to a provider for accounts receivable that the provider has assigned, sold or transferred to the individual organization for an added fee or a deduction of a portion of the accounts receivable. Factor does not include a business representative as described in paragraph (f) of this section.
Organized health care delivery system means a public or private organization for delivering health services. It includes, but is not limited to, a clinic, a group practice prepaid capitation plan, and a health maintenance organization.
(c)State plan requirements. A State plan must provide that the requirements of paragraphs (d) through (h) of this section are met.
(d)Who may receive payment.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
(3) In accordance with paragraphs (e), (f), and (g) of this section.
(e)Reassignments.Payment may be made in accordance with a reassignment from the provider to a government agency or reassignment by a court order.
(f)Business agents.Payment may be made to a business agent, such as a billing service or an accounting firm, that furnishes statements and receives payments in the name of the provider, if the agent's compensation for this service is -
(1) Related to the cost of processing the billing;
(2) Not related on a percentage or other basis to the amount that is billed or collected; and
(3) Not dependent upon the collection of the payment.
(g)Individual practitioners.Payment may be made to -
(1) The employer of the practitioner, if the practitioner is required as a condition of employment to turn over his fees to the employer;
(2) The facility in which the service is provided, if the practitioner has a contract under which the facility submits the claim; or
(3) A foundation, plan, or similar organization operating an organized health care delivery system, if the practitioner has a contract under which the organization submits the claim.
(4) In the case of a class of practitioners for which the Medicaid program is the primary source of service revenue, payment may be made to a third party on behalf of the individual practitioner for benefits such as health insurance, skills training and other benefits customary for employees.
(h)Prohibition of payment to factors.Payment for any service furnished to a beneficiary by a provider may not be made to or through a factor, either directly or by power of attorney.
[ 43 FR 45253, Sept. 29, 1978, as amended at 46 FR 42672, Aug. 24, 1981; 61 FR 38398, July 24, 1996; 79 FR 3039, Jan. 16, 2014]