Health care receivable securitizations: structuring issues and future trends.

AuthorFlaum, Delllah Brummet

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.

  1. INTRODUCTION

    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 present 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.

  2. 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...

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