Patient Account Loan Programs: Factors to Consider for Improved Bottom Line
Banks are showing increased willingness to consider patient account loan programs with health care providers. Whether this is due to larger average self-pay account balances, low interest rates for commercial loans that make consumer loans more economically interesting to banks than in past decades, or other developments, this bank trend presents opportunities for health care providers. This article discusses some of the factors a provider should consider if it has decided to use a patient account bank loan program. Attention to various factors can improve a provider’s bottom line results in the program.
In this article, “obligor” means a patient or other responsible individual (e.g., a husband for a wife’s medically-necessary health care). This article uses “Loan” to refer to loans by a bank to obligors where there is a specification that loan proceeds be paid to the provider or deposited into a bank account the provider maintains at the bank, and where the loan fits parameters agreed to in a master contract between the bank and the provider.
One common bank loan program is sometimes called a “referral program.” A provider mentions the loan program to obligors early in the account process, perhaps at admission. The provider agrees to buy from the bank all defaulted Loans if the bank timely tenders them to the provider. The provider receives nothing for the referral. But the loan program is considered a “win-win” for the bank and the provider because the provider’s account receivable is paid promptly by the Loan.
Here are some of the many factors to consider when structuring a referral program:
- Interest or fee buy back duty? By definition, in a referral program the provider must commit to buying the principal of the Loan from the bank if timely tendered to the provider after default. But the provider should negotiate carefully relative to components of a Loan balance. Banks commonly insist that the provider commit to buying the interest as well as the principal balance, though a provider should probe the bank on that topic in case an uncommonly favorable arrangement can be reached. Origination fees and late fees often can be excluded from the provider’s purchase duties. The interest rate should be capped, not only as a courtesy to obligors and thus potentially positive patient relations for the provider, but also to avoid giving the bank high economic incentives to lend to nearly every obligor, without much due diligence, since the provider is almost certain to fulfill its purchase obligation if a Loan defaults.
- Deadline for the bank’s tender to force the provider’s purchase of any defaulted Loan. This factor involves a “balancing act” by the provider. On the one hand, the provider wants the bank to engage in reasonable collection activity in the Loan defaults. On the other hand, the provider does not want interest to accrue for months and months on a defaulted Loan if the provider eventually must buy it from the bank. Some recent tender deadlines we have seen are 90 or 120 days after default, with the bank expected to work the account according to collection steps specified in the master agreement the provider has with the bank.
- Bank collection duties. These should be specified and should include letters and at least two call attempts. The provider also should insert in the master agreement a duty on the bank to act (before the bank’s tender deadline) at least as diligently as the bank does in trying to collect the bank’s own consumer loans.
- Truth-in-Lending and related loan regulations. Banks often seek, in a first draft of a master agreement, to require a provider to warrant or indemnify in favor of the bank relative to loan compliance. But the provider should reverse such language: In a referral program the bank makes the loan, not the provider. A bank is much more familiar with Truth-in-Lending, Equal Credit Opportunity Act, and related loan regulations than is a provider. So if an indemnity exists on this topic, it should be by the bank in favor of the provider.
- Documents to the provider if the provider buys a Loan. In addition to timely demand on the provider, the bank as a condition precedent to a provider’s purchase duty should be required to transmit to the provider a properly signed original promissory note, an affidavit of the Loan balance, recent obligor contact information, data about any obligor complaints or defenses asserted to the bank, and other documents.
Experienced legal counsel can help with provisions in a master agreement between a bank and a provider. A properly structured and worded master agreement improves not only direct economic results but also patient satisfaction throughout the post-billing process, and compliance with HIPAA and other privacy principles. Marked improvement can occur in the provider’s bottom line.