Health Care Receivables Securitization: Structuring Issues And Future Trends
Contributor
Banks that provide financing for health care receivables can tap a growing market. Careful valuation of the receivables and a sound legal structure are important.
In recent years, a number of health care providers have considered securitizing their health care receivables to meet their capital and other financing needs. Health care receivables securitizations are structured so that the health care providers sell their receivables to securitization vehicles and receive in cash an amount equal to a significant percentage of their net receivables much faster than in the ordinary course of business, thus greatly improving cash flow and in many instances maximizing the recovery of their receivables. These transactions have included the issuance of rated and nonrated medium-term securities and commercial paper as well as sales to multiseller conduits that in turn issue commercial paper.
A securitization of health care receivables is structured to be off balance sheet, and the seller may be able to lower its cost of funds by using the credit rating of the asset pool rather than its own credit rating. Selling health care receivables through a securitization device also generally will not cause any restrictions to be placed on other financing options. And a securitization often will not violate negative pledge covenants in capital financing documents that may prohibit health care facilities--especially hospitals--from pledging assets to secure other loans, although existing financings will have to be reviewed to determine if they limit receivables sales or pledges. In addition, a securitization may be a safer form of financing, since the bankruptcy of a seller should have no material impact on the purchaser because, if the sale is properly structured, the receivables would not be part of the health care provider’s bankruptcy estate. The total market of potential health care receivables that could be securitized is conservatively estimated at between $400 billion and $800 billion in receivables or payments received by health care providers annually. To date, only a fraction of the receivables have been securitized, in part due to the availability of tax-exempt financing for nonprofit providers, bank lines of credit, and the continuing consolidation of health care providers nationally. However, as health care providers consolidate and fully integrate their management information systems (including on-line, real time, accounts receivables systems) and more health care payments are made based on preset reimbursement rates, more providers are likely to consider securitizing their health care receivables.
This article will review structuring issues common in health care receivables securitization, including determining eligible receivables and the valuation of such receivables; reporting and servicing requirements; Uniform Commercial Code (UCC) considerations; structuring a transaction to be consistent with the antiassignment provisions applicable to government receivables such as those payable by Medicare and Medicaid; true sale considerations; and financing strategies.
Determining Eligible Health Care Receivables
Determining eligible health care receivables involves understanding the receivables available to be securitized and determining which ones the transaction will deem as eligible for sale. In a health care securitization, the purchaser buys receivables that are originated by various health care institutions and professionals through the provision of goods and services to patients. Unlike traditional types of trade receivables, the obligors in a health care securitization are not the purchasers of the goods or services but instead are usually third-party payors that are obligated to reimburse the health care providers for the goods and services provided to their patients. Normally the copay or deductible, the portion of a receivable payable by a patient, is not considered to be an eligible receivable. The gross charges for health care services billed by providers may bear little relation to the amount that ultimately will be reimbursed by third-party payors.
Unlike conventional trade receivables, the gross charges for health care services billed by providers may bear little relation to the amount that ultimately will be reimbursed by third-party payors. The amount of reimbursement varies among each payor class based upon its own unique procedures and guidelines. For example, Medicare reimburses most hospitals a fixed amount for each inpatient hospitalization based upon several hundred diagnoses-related groups (DRGs) under the prospective payment system (PPS). However, certain services provided by other health care providers are reimbursed by Medicare based upon a preset or scheduled rate or the reasonable costs of services furnished by the provider or the provider’s customary charges for such services, whichever is lower. Medicaid reimbursement is based upon each state’s Medicaid plan, which must be approved by the federal Health Care Financing Administration (HCFA), with some states moving toward more prospective, preset reimbursement rates. Generally, the swiftness of Medicaid payments depends on the state’s fiscal health or general payment timeliness. Some Blue Cross/Blue Shield and other private insurance plans other than health maintenance organizations (HMOs) reimburse on a per diem rate as a percentage of a provider’s fees and charges or net of any patient copayment or deductible on a fee-for-service basis so long as such fees are usual and customary. To compete with HMOs, however, more and more of these plans also offer managed-care-type options such as reimbursement based upon a fixed amount for certain services or based on a capitated rate, or "capitation," where a fixed fee is paid for each person enrolled regardless of services used by enrollees.
Because the amounts reimbursed by the payors are generally less than the face, or gross, amount of health care receivables, one of the key structural aspects of any health care receivables securitization is developing the standards to be used in determining the "net value” of the health care receivables, which in turn will be used as the basis for establishing the purchase price or advance rate for the securitization. Generally, the difference between the gross amount and the net value of health care receivables, known as the contractual allowance, can be determined with certainty only after the health care provider is reimbursed by the third-party payor. Therefore, the securitization agreements for any health care receivables transaction should provide appropriate guidelines for estimating the contractual allowance together with built-in safeguards to protect against the risk of overstating the net value of the health care receivables. Estimations of the net value should be based on the reimbursement rate experience of each payor as updated periodically during the term of the transaction. Protection against overvaluation of the net value may be provided in the form of reserves, discounts, or recourse to the health care provider.
Reporting And Servicing Requirements
Given the intricacies of the billing and collection of health care receivables and the complexity of predicting the amount that ultimately will be reimbursed by the payors, a health care securitization must rely heavily on the capabilities of the servicer of the receivables. Investors and financial institutions participating in the transaction should carefully evaluate the servicer risk inherent in a health care securitization. The servicer should have a sound reputation and an established track record that demonstrates an ability to predict the amounts to be collected on the health care receivables. The servicer also should have a proven record for accurately billing payors and timely resolving any disputed claims that may arise.
In addition to servicer and collateral valuation risk, a health care receivables securitization is subject to potential offset risks. The Medicare and Medicaid programs permit such payors to offset amounts that are determined to be overpayments to providers for past payments against payments due to such providers on current health care receivables. Any such offsets would of course dilute the value of health care receivables purchased in the health care securitization. This offset risk has been diminished as more providers are paid based on preset reimbursement rates. Nevertheless, the structure of any health care receivables securitization should include appropriate reserves, discounts, or other protections to cover the risk of offsets.
Uniform Commercial Code Considerations
In the event of a health care provider's bankruptcy, the securitization vehicle also must have taken the proper steps to perfect its ownership interest in the health care receivables in order to have prior rights in the receivables against the bankruptcy trustee and against creditors of the provider. Even though the transaction may be structured as a " true sale” of receivables, the securitization vehicle must file a financing statement under the UCC in order to protect its interest in those receivables. The steps that must be taken to perfect a purchaser's interest in Medicare and Medicaid receivables mirror the requirements for traditional types of trade receivables. Generally, receivables generated under these government programs are viewed as social welfare programs rather than insurance and therefore as accounts under the UCC. As with the sale of any account under the UCC, perfection is accomplished by filing a financing statement against the provider.
There is some question, however, as to whether health care receivables payable by insurance companies are accounts or whether they represent an interest or claim under an insurance policy. This issue is important because receivables representing an interest in or claim under an insurance policy are not covered by the UCC (although, as noted below, the UCC is being revised). To be safe, in addition to filing a financing statement, in most health care receivables securitizations, the purchaser also should take steps to perfect under the common-law rules that govern perfection in insurance-related rights whenever the UCC does not apply. Although the rules vary from state to state, generally most states follow one of wo rules: the American rule or the English rule. Under the American rule, the first party to receive the assignment of the receivables from the provider takes priority. Under the English rule, the first person that gives notice to the insurance company of the assignment takes priority. Because a state that has adopted one of these rules is free to adopt the other, it is advisable to take steps to perfect under both rules--that is, in addition to obtaining comfort that no prior assignment of the receivables has occurred, the purchaser in a securitization transaction should give notice to the insurance company of the provider's sale of the receivables to the purchaser. It should be noted that the UCC is being revised. As part of that revision, it is anticipated that health care insurance receivables will be covered by the UCC.
Antiassignment Provisions And Government Receivables
The government limits a provider's ability to assign its rights to receive payments from Medicare and Medicaid and other government health care programs. These so-called antiassignment or antifactoring provisions generally prohibit payment for services furnished by a provider to be made to any person other than the provider, subject to certain limited exceptions. The legislative policy underlying the antiassignment or antifactoring rules is the prevention of fraudulent and inflated claims and abuses that were present in the factoring of health care receivables before congressional action in the 1970s.
Interpretations of the federal government's antiassignment or antifactoring rules and policy statements indicate that a securitization of Medicare and Medicaid receivables is permissible so long as certain conditions are met. Primary among those conditions are that Medicare and Medicaid payments must be sent directly to the provider's address or bank account--not to the securitization vehicle--and that the payments must be in the control of the provider before being turned over to the securitization vehicle. To satisfy such requirements, a health care securitization should require that payments on Medicare and Medicaid receivables that are sold to the securitization vehicle will continue to be made to a lockbox account in the name of the provider. Generally, an instruction is given by the provider to the lockbox bank to make daily transfers from the related lockbox account to the bank account of the trustee or collateral agent for the securitization.
Compliance with government receivables regulations creates potential commingling in an account of the seller or provider. Because compliance with government receivables regulations creates potential commingling in an account of the seller or provider, which might cause loss of funds in that account in the event of a provider bankruptcy, potential commingling should be kept to a minimum by daily sweepings of collections in the provider's lockbox account. This procedure will ensure as much as possible that such collections are not part of the estate of the provider in the event of the provider's bankruptcy.
Notwithstanding such arrangements, in the event of a bankruptcy of a provider, payments from the provider's lockbox could be delayed by operation of the automatic stay provisions of the Bankruptcy Code until the securitization vehicle establishes that it is the owner of the receivables. An exception to the antiassignment or antifactoring rules permits payments of Medicare and Medicaid receivables to be made to a person other than the provider if such payment is made pursuant to a court order. It is therefore advisable that the documentation for a health care receivables securitization contain provisions authorizing and requiring the securitization trustee or program administrator, upon the bankruptcy of a provider, to request an order from the bankruptcy court directing that payments on the government receivables be made directly to an account maintained by the securitization vehicle, rather than to the provider's lockbox account.
True Sale Considerations
The purchase of health care receivables also must constitute a true sale of the receivables in order to further insulate the purchaser from the bankruptcy risk of the seller. Although courts consider many factors in determining whether a transfer of receivables is sufficient to remove the receivables from the bankruptcy estate of the seller, if it appears that the risk of loss for nonpayment of the receivables has been retained by the seller, the transfer could be recharacterized as a borrowing by the health care provider rather than as a true sale. Therefore, the securitization should be structured to limit recourse to the seller--here, the health care provider--for nonpayment of the sold receivables (except for a breach of representations and warranties where the remedy would be the repurchase of the receivables). Some level of protection against credit losses in the form of a reserve or discount is appropriate in a health care receivables securitization, so long as the level of the reserve or discount corresponds to historical losses on the receivables or to the obligor concentrations with respect to such receivables.
Financing Strategies
The role of banks and other financial institutions in health care receivables securitization is varied, depending upon a particular institution's commitment to the health care industry and the institution's expertise. As a general matter, many banks and financial institutions have expressed interest in providing lines of credit, including warehouse lines, for health care receivables securitizations. This level of participation is open to a wide variety of institutions and requires only a general level of expertise in health care. Some banks with more extensive experience have developed expertise as trustees for health care receivables securitizations. Some financial institutions with additional expertise have ventured beyond the trustee role to provide backup servicer capabilities, to develop overall servicing and administrative functions, and to purchase the receivables themselves.
Future Trends In The Securitization Of Health Care Receivables
Health care providers have been and will continue to be under increasing pressure to reduce costs at a time when they are already operating under difficult economic constraints. Declining hospital admissions, overcapacity of health care facilities, and more restrictive reimbursement policies have hampered the cash flow and profitability of the industry. One outcome of such pressures will be the need for health care providers to better use their resources and broaden their financing options. Recent transactions have shown that securitization can provide the health care industry with the same benefits other industries have enjoyed. Through health care receivables securitization, a typical health care provider can receive cash in an amount equal to a significant percentage of its net receivables much earlier and faster than it would without the securitization--and with off-balance-sheet accounting treatment. Such benefits are likely to be even more important in a health care system undergoing tremendous change through reform, with great pressure to hold down costs and even more emphasis on receivables as the key assets of any provider.
As banks, other financial institutions, and health care providers become more familiar with the structure and benefits of health care securitization transactions, the number of such transactions is likely to increase. To be successful, health care receivables securitization transactions must be both properly structured and tailored to an increasingly market-driven health care industry. The structural requirements for a successful health care receivables securitization include a good net receivable valuation process; an efficient and experienced servicer; and a sound legal structure, including with respect to reliable lockbox arrangements. If these structural concerns are satisfied, and market forces continue to cause health care providers to focus on costs and receivables, securitizations of health care receivables are likely to become more popular.
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