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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 mediumterm 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...