eNews February 20

In the News

February 20, 2020


What’s the Deal with Health Care Payments?

—Michael Miller, managing editor

Every industry has its own issues when it comes to payments. Construction is known for having payment delays due to disputes, while the food industry will often have shorter payment terms because of the product being sold. But where does health care fit within the two extremes? There are even similarities and differences within the health care industry depending on where a business falls in the supply chain.

“The stress in the health care industry is related to reimbursement,” said Tony Acevedo, director of credit with wholesaler Smith Drug Company. “Most of our customer base—pharmacies—use a third-party to facilitate insurance claims; the process has to go through multiple hands before the end user—our customer—gets funds.” There are enormous amounts of fees that are involved with that—take a chunk of the reimbursement for those fees. It is a substantial amount of money, and it puts a cash flow crunch on pharmacies, Acevedo’s customers.

“Unlike traditional B2B areas, where the supplier and customer have agreed upon pricing, and it is the exception when the payment amount does not equal the billed amount,” said Todd Harbison, chief revenue officer for payment solutions firm Ventanex, in a PYMNTS article. “[I]t is standard practice in health care for a provider to bill one amount only to have the payer decide to pay a completely different amount.”

Acevedo said, it is unknown what will actually be refunded back. “It could be pennies on the dollar,” he added. Gross margins are at a 10-year low in the industry, and the industry average is below 20%. They had been 21-22% in the past. “This creates a cash flow strain and trickles down to us, the wholesaler. There has been a lot of push for extended terms to help with cash flows. The biggest drivers behind delinquency and slow pay or shifts in DSO—the reimbursement problem in our industry,” Acevedo said.

Shannon Garrison-Bell, CICP, manager of revenue operations with medical device manufacturer Sientra, has found automation to be a great payment tool in health care. “A lot of it has to do with the size of the customer we work with. Larger entities are moving toward automation portals or payment systems. For companies that have done that, payments are ahead of schedule or right on time. For smaller companies, it seems to be averaging 30 to 60 days. She added her mid- to large-sized customers are moving accounts payable functions to portals. “As a vendor, it’s easier if a customer has a portal. I can add documents to the system and to not waste anyone’s time.” She has workflows to establish consistent contact with customers before payments are due, and has found this increases the likelihood of payment before the due date.

The response from Acevedo to combat payment issues was less aggressive financing offers. “It was not uncommon for wholesalers to offer extended finance terms or get creative with terms—getting away from that as an industry overall now.” This resulted in a niche industry, or third-party brokers specific to the industry that are willing to finance his customer base. Wholesalers will now not provide finance terms but create connections with customers and the third party. However, one of the challenges in the industry is connecting the two parties as wholesalers historically were the financing option. Traditional financing sources such as banks have a hard time finding the value of prescription files, said Acevedo, which have actual monetary value that can be sold as an asset. Banks won’t typically accept that as collateral.

“Typically, we encourage to have the option to draft from customer accounts—request customers to provide bank information for drafting from account. There are no guarantees the funds will be there though,” Acevedo said.


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The Right Time to Enforce a Lien and When to Foreclose

—Christie Citranglo, editorial associate

Mortgages on homes for consumers and mechanic’s liens in the business-to-business (B2B) landscape can work in similar ways. In the consumer context, if a borrower does not pay the mortgage payment, the mortgage lien does not guarantee the bank will be paid. But having a mortgage lien gives the bank options and puts them in the best possible position to get paid. The same is true when a mechanic’s lien is filed. 

The mechanic’s lien does not guarantee payment, rather it puts the creditor who filed the lien in the best possible position to get paid. Once a lien is filed, the trade creditor has options⁠—but the creditor must also consider a few caveats.

The trade creditor should first look to the state statue to determine the deadline date to file suit to enforce the lien. Each state statute is different, and so is the deadline date. Knowing the correct date can affect the validity of a lien. It’s crucial creditors stay aware of the date and set a tickler.

In certain circumstances, a creditor may have to foreclose on a lien, should the creditor still struggle to get paid. When considering foreclosing, the creditor must first consider how much money is owed. The decision to initiate a lawsuit to foreclose on a lien is a big decision and often requires the skill of a competent attorney.

The lien itself can be challenged by the owner. There may be other parties who have filed a lien, and there may be possibilities to join together in a suit action. Foreclosing is not a simple process and creditors need to be prepared to determine how much money they are willing and/or able to spend to enforce your rights.

When deciding to foreclose, creditors should work with the proper team to ensure the process runs smoothly, be it with an attorney and/or with NACM’s Secured Transaction Services (STS).

Typically, the fees and cost for preparation and filing of a foreclosure action are around $2,000-3,000 without appearance at Trial or discovery requests. Then, if the matter is not resolved quickly and the suit has to go to mediation, answers and discovery, the attorney fees stack up.

Once a suit that is expected to be foreclosed is filed, the attorney will have between 20 and 45 days to serve a response. If there is no response in time, a Motion for Default would be filed.  Once the Default is entered, a Motion for Final Summary Judgment would be filed—thereafter, the collection process would commence. Foreclosing is a costly, time-consuming process and should be approached with thoughtful consideration.

The biggest win on a foreclosure is to get paid right away; the fees can stack up quickly. Going through the process of foreclosing—dealing with answers, discoveries, attorneys fees, etc. —may not even be worth it, depending on the amount owed. For instance, if a creditor is owed $5,000, going through the process of foreclosing will not grant them enough money in return to make the process of foreclosing worth it.

There may also be politics involved. The decision to move forward and initiate a lawsuit may, and often does, involve the customer. That customer may reach out to management and/or sales to plead their case to keep the suit action from proceeding. If that happens, creditors should keep emotions in check. They will need to keep an open mind and be prepared to argue their side in a constructive way.

Alternatively, if a creditor ever gets served to the part of a foreclosure action from another lien holder, the person initiating the foreclosure action is going to be spending the most money. This party has the work of getting the suit filed.  If a creditor is ever served to be part of a foreclosure action by another lien holder, that’s the least expensive way to get into the foreclosure action.

Creditors should never jump into foreclosure action if there is a dispute—they should consider the options and costs involved, first.


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Vendors Now at Risk with Evolved BEC Scam

—Andrew Michaels, editorial associate

Business email compromise (BEC) is a threat to businesses worldwide. A textbook example of fraud, BEC scams begin with an email to an employee in the finance department, requesting internal and/or confidential information—for instance, a wire transfer—from what appears to be a reliable source within the company, e.g., manager, CEO, etc. Once the relationship is established, the employee is often convinced of the other person’s identity and completes their request. The end result: Stolen money and/or private company data.

Working in an industry driven by finance, credit professionals are highly susceptible to BEC, which continues to evolve just as fast as targets catch on. Bank Info Security reported fraudsters latest tactic not only involves companies’ financial and accounts receivable departments, but also the customers of those companies. This new play is referred to as VEC, or vendor email compromise.

In January, security firm Agari reported scammers are now asking finance departments for aging reports, which are used to “track unpaid customer invoices.”  Aging reports detail companies’ collection process and include detailed information such as customer names and contact information, what they owe and how long payments are overdue. During the firm’s research, Agari had an investigative interaction with a VEC scammer they referred to as “Ancient Tortoise”—unbeknownst to the scammer—and received the following email:

I need you to email me the aging report from A/R (Due within the next 30 days and a month overdue), and also include customer payable contact email on this report.
When can you get it done?


Agari then sent Ancient Tortoise a fake aging report. Within days, Ancient Tortoise impersonated someone from Agari’s fake company and contacted one of their “customers”, asking for all outstanding invoices to be paid via ACH or wire to a new account.

Just like BEC, VEC can happen to any business, big or small. Such scams are becoming harder to identify, especially since the attack happens outside the initial company where information was stolen. A recent case in Erie, Colorado, remains under investigation after a scammer posed as a contractor and stolen over $1 million from the town.

According to reports from the local ABC affiliate, Erie town officials were working with SEMA Construction to construct a bridge in October 2019 when a scammer posing as the contractor asked for payment via electronic funds transfer rather than check. The following month, town officials contact SEMA Construction who said they never received payment or requested a change in payment. As of January 2020, The Denver Post (The Post) reported, the FBI was working with the town to recover money through insurance.

“The town is actively using other information gleaned from the investigations to identify potential risk and to mitigate those risks,” Erie Town Administrator Malcolm Fleming said in an email retrieved by The Post.



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Periodic Lien Waiver and Release Barred Subsequent Claim

—Stan Martin

Monthly lien waivers are a common element of the payment process for a construction project. Often, the lien waiver form includes acknowledgment of payment in full through a date certain, and sometimes the form includes release language. A New York court has reminded a subcontractor that these terms have meaning and can bar a subsequent request for additional money.

The subcontractor in this case had signed a monthly lien waiver form that included the following language:

the undersigned acknowledges and agrees that it will have received payment in full, less retainage withheld, for all services and work performed and all materials and equipment furnished or stored in connection with the construction of the Project through the Period Ending Date, and hereby now and forever waives, releases and quitclaims, with respect to the Project, all claims and rights to claim against the Contractor, the Owner, the Lessor, the Lender or the land upon which, or the improvements within which, the Project is situated, except for retainage withheld . . . (emphasis added)

The relationship between GC and sub had obviously soured, and when the GC issued a notice of default, the sub fired off change orders for extra work it claimed to have performed. Whether or not it had actually performed extra work (a point in dispute), the court was convinced that the sub’s claims would not survive the acknowledgment and release the sub had provided on a monthly basis. Thus, the court granted the GC’s motion to dismiss the sub’s claims.

The lesson? Pay attention to monthly lien waiver forms. And if there are pending disputes, don’t sign a certificate saying there aren’t any such disputes. The case is Metro Woodworking Inc. v Hunter Roberts Constr. Group, LLC, 2020 N.Y. Misc. LEXIS 409 (Jan. 23, 2020) (subscription required).

Stan Martin holds a law degree and an undergraduate degree in architecture. He has been involved with the construction industry for more than 45 years, working in construction prior to law school, and practicing law over 35 years. Stan drafts and negotiates contracts, provides counsel and advice on project issues and contract rights/obligations, and handles disputes in court and in arbitration.


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