ACO Repayment Mechanisms – Surety Bonds as an Alternative to Letters Of Credit

Track 2, Track 3 and NextGen ACOs have to demonstrate that they would be able to repay shared losses incurred at any time within the agreement period, and for a sufficient period of time following the end of each agreement period (the “tail period”), to permit CMS to calculate the amount of any shared losses that may be owed by the ACO and to collect this amount from the ACO.

An ACO’s repayment mechanism must be equal to at least 1% of its total per capita Medicare Parts A and B fee-for-service expenditures for its assigned beneficiaries, as determined based on expenditures used to establish the ACO’s benchmark.

In their application to the Shared Savings Program or for renewal of their participation agreement, ACOs must select from one or more of the following 3 types of repayment arrangements:

  1. Funds placed in escrow,
  2. A line of credit as evidenced by a letter of credit that the Medicare program could draw upon, and/or
  3. Surety bond.

Most people are familiar with Letters of Credit or LOC’s but here are 6 reasons to consider a surety bond as an alternative to an LOC*.

  1. Credit capacity: An LOC ties up the company’s credit capacity, thus reducing financial flexibility. Surety bonds are not credited against a company’s bank line.
  1. Covenants: Banks may place restrictive covenants on the client in return for extending a bank line of credit, or they may require extensive financial reporting. Surety companies typically offer more flexibility.
  1. Security: Banks may choose to take a security interest in the client’s assets. This security is required to be perfected through the filing of public documents (UCC filings) that publicize their secured lender status. A surety is generally an unsecured creditor and a UCC filing is rarely made.
  1. Default defenses: A bank LOC is a demand instrument; a surety bond typically is not. An LOC may be drawn down at any time, without any reason; the company has no defenses. With a surety bond, the surety requests proof of a company’s default from the obligee and works with the principal to identify defenses. This protects the principal from the obligee taking possession of the bond proceeds without merit.
  1. Claim handling: The surety typically has a professional, dedicated claims staff available to handle disputes and to assist in the claim resolution process. Banks do not have a claims staff, which requires a client to resolve disputes on its own.
  1. Rates: LOC rates can be volatile: the LOC rate may include a commitment fee or utilization fee, as well as issuance fees, in addition to a stated rate. Surety rates tend to be stable and are directly tied to the credit quality of the principal and to the types of obligations bonded.

Need help securing your repayment method?  Call Tracy Hoffman today for a no-obligation quote at (860).927.0995 or contact us here.

* as analyzed by The Travelers Indemnity Company.