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.