CAN MEDICARE AND MEDICAID RECEIVABLES BE FACTORED? Allen J. Heffner and Bruce E. Loren | Jan 31 2020

Our factoring clients are constantly trying to expand their portfolios to capitalize on underexploited markets. One of those markets is healthcare receivables. Factors considering advancing on healthcare receivables almost always ask the same questions – Are there anti-assignment provisions relating to Medicare and Medicaid? How can we protect ourselves without the benefits of UCC § 9-406? This article addresses those questions and provides strategies for Factors who wish to factor Medicare and Medicaid receivables.

Anti-Assignment provisions relating to Medicare and Medicaid

It is true that the Social Security Act and other federal regulations restrict the assignment of Medicare and Medicaid receivables. Specifically, these statutes state that:

No payment which may be made to a provider of services under this subchapter for any services furnished to an individual shall be made to any other person under an assignment or power of attorney.

Even after delivering a Notice of Assignment in accordance with UCC § 9-406, this statute makes clear that payments on Medicare and Medicaid receivables cannot go to anyone other than the provider. There are exceptions to this rule, but none apply to Factors. Moreover, the Medicare Claims Processing Manual contains a provision that states: "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." Based upon these express provisions, it is no wonder that Factors are leery of getting involved with Medicare or Medicaid receivables.

Based upon those statutes, is it legal for Factors to advance funds on these receivables?

Factoring Medicare and Medicaid receivables is not illegal. Despite the explicit language in the statutes and regulations, there is nothing to prohibits the assignment of these receivables. The restriction only applies to whom the payments should be made to.

How can Factors protect themselves without an enforceable Notice of Assignment?

If a Factor is going to factor Medicare and Medicaid receivables, they will have to secure their position by structuring a different method, typically using a double lockbox arrangement.

The first lockbox should be dedicated to receiving the Medicare and Medicaid receivables. It is imperative that this lockbox be solely in the name of the provider and not in the name of the Factor. This lockbox must specify that the provider has the ultimate right to direct the disposition of funds from this lockbox and has the right to rescind any sweep instructions. For better or worse, this lockbox must be controlled by the provider. The second lockbox should be dedicated to receiving all non-Medicare and Medicaid receivables. This lockbox can and should be in the name of the name of the Factor, for the benefit of the provider.

All Medicare and Medicaid receivables must be paid into the first lockbox. Factors must make sure that this lockbox is swept on a daily basis and transfer all funds to the second lockbox. This way, the Factor is aware of all funds received by the provider and has daily control over all funds received by the provider. Because the initial payments must go to an account controlled by the provider, there is some risk, however, Factors who closely monitor the first lockbox and put in daily sweeps are able to mitigate much of that risk.

Although factoring Medicare and Medicaid receivables does not work in ways Factors may be accustomed to, factoring Medicare and Medicaid receivables is legal, and if structured properly, Factors can have nearly the same level of comfort that it would if there was an enforceable Notice of Assignment in place.

Bruce Loren and Allen Heffner of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. For over 30 years, Mr. Loren has focused his practice on construction law and factoring law. Mr. Loren has achieved the title of "Certified in Construction Law" by the Florida Bar. The Firm represents factoring companies in a wide range of industries, including construction, regarding all aspects of litigation and dispute resolution. Mr. Loren and Mr. Heffner can be reached at bloren@lorenkeanlaw.com or aheffner@lorenkeanlaw.com or 561-615-5701.