Effective July 25, 2004, CMS changed its policies affecting all Medicare providers and suppliers that have lending relationships with banks or similar lending institutions, through which Medicare payments are electronically deposited in an account with that same lender. The change was made in Transmittal 213, issued June 25, 2004.

This change does not affect providers and suppliers issued checks by CMS, after which those checks are endorsed and deposited with a lender. It does not affect providers and suppliers receiving a direct deposit of CMS payments into a sweep account under the provider or supplier's exclusive control, from which funds are then transferred automatically into an account with a lender. Rather, the revised policy applies to providers and suppliers electing electronic deposit of Medicare payments into an account with an institution that is also the lender to that provider or supplier.

The change affects section 30.2.5 of the Medicare Claims Processing Manual, the manual in CMS's online manual system that replaces the Medicare Carrier's Manual. Providers, suppliers, and banks previously would have been governed by section 3488.2 of the Medicare Intermediary Manual (applicable to providers) and section 3060.11 of the Medicare Carrier's Manual (applicable to suppliers). These provisions implement exceptions to the prohibition against a Medicare provider or supplier reassigning its right to Medicare reimbursement to anyone else, subject to certain specific exceptions. One of the exceptions applied to situations in which the provider or supplier might have pledged Medicare accounts receivable to a lender. The basic rule has been that CMS will pay only the provider or supplier and not the lender, absent a court order to the contrary. Thus, while a lender might hold a security interest in a Medicare account receivable, the lender was not entitled to direct payment absent a court order, such as might be obtained following a default.

CMS has historically maintained that to ensure there is no prohibited reassignment in the case of a provider or supplier with a direct deposit relationship with a bank, the provider or supplier must have exclusive control over the account. This has led to a practice through which, if a provider or supplier wishes to pledge Medicare accounts receivable as security for a loan and also wishes to establish a direct deposit relationship with CMS, the provider or supplier opens a sweep account with the financial institution over which the provider or supplier has exclusive control. After the electronic deposit from CMS, funds may be swept into some other operating account in which the lender may have rights.

Formerly, CMS's manuals stated that a bank that was acting as a lender to a provider or supplier could not also be the institution to which CMS would electronically deposit funds. This reflected CMS's view that the lending institution, while not listed on the account, might have control over the Medicare payments. Transmittal 213 changes that policy, permitting a provider or supplier to have a direct deposit account with a bank that loans money to the provider or supplier so long as the bank states in writing, in the loan agreement, that it waives its right of offset against that direct deposit account.

Also, irrespective of whether or not a provider's or supplier's direct deposit account is with a bank that is a lender to that provider or supplier, it must be clear that the provider or supplier has sole control over the account. In other words, even though a provider or supplier may have an agreement with a third party, such as a bank or other source of financing, to which Medicare receivables have been pledged, the depository bank must honor the provider or supplier's instructions concerning the use of the funds even if it violates that agreement with the third party. Moreover, a billing agent may have rights to withdraw funds from a provider or supplier's direct deposit bank account, to pay amounts as the provider or supplier directs and to withdraw funds for its own fees, so long as the provider or supplier has the right to issue contrary instructions that the bank will honor.

In the case of a default on any loan agreement, billing agreement, or similar arrangement that gives rise to a court order directing CMS to make direct payments to a third party, CMS will honor that order. In addition to securing that court order, the party claiming such payment must file a certified copy of the order with the Medicare contractor. The court order may identify a specific sum payable to a particular person or entity, or it may apply to all Medicare payments due to a particular provider or supplier for a definite or indefinite period. Absent that court order, CMS requires the bank to be bound by the provider's or supplier's instructions. This means that in the event there is a default under a loan or other agreement secured by directly deposited Medicare accounts receivable, unless the provider or supplier cooperates in issuing instructions that assure payments continue to be made from that account, banks, lenders, or other persons with a claim against those accounts will have to be more proactive by seeking court orders to assure direct payments from CMS. Existing agreements with banks, other lenders, billing agents or other third parties affecting directly deposited Medicare payments should be reviewed to ensure compliance with these requirements.