HomeCase StudySolutions for the private health care sector in sourcing liquidity.

Solutions for the private health care sector in sourcing liquidity.

Case Study Content


As a general rule, payments are deferred in EU-based commercial transactions. There are often delays in paying invoices, particularly in public procurement contracts, where during 2009 they  average 67 days, compared to 57 days for the private sector. A  "late payment culture" has evolved in certain Member States, becoming general practice, with very serious economic and social consequences, late payments being  used as a substitute for bank credit. Payment periods are unjustifiably long in many cases, often due to a privileged position, and this can have a particularly significant effect on small businesses, or even medium-sized companies. Small businesses are vulnerable in negotiations, given their level of competitiveness and market positioning, fear of harming relations with payers and limited experience and  resources when it comes to initiating legal proceedings to recover debts.

The main negative effects of late payments are:
 - generate substantial additional costs for creditors and complicates their financial management;  late payment is detrimental to cash flow, increases uncertainty for many creditors and significantly affects their competitiveness, profitability and viability, particularly at a time of costly access to finance;
 - often lead to subsequent delays in paying suppliers and employees, as well as VAT, duties and State and social security contributions (detrimental to public revenue collection). A specific example is the burden that falls over the public health care suppliers in Romania , derived from the obligation to pay 24% VAT on a monthly basis for the income generated although related invoices are cashed in after one year.
 - can lead to bankruptcy for normally viable companies;
 - can foster corruption (to speed up the payment of invoices by public authorities) or procurement practices that go over budget;

Surprising ( but not so surprising), Romania  is one of the EU states where the Government is “practicing” the late payment behavior in relation to the suppliers of the public healthcare  system.  First, an official position was taken within the provisions of the Framework Agreement in late 2009, increasing the payment terms for pharmaceutical products  from 120 to 210 days; this national regulation  getting in conflict with the late payment EU Directive 2000/35. As if it was not enough, according to National Health Insurance House financial statements, at the end of 2009 the  days payables  for drugs topped 310 days.   During 2010 the situation got worst; according to market intelligence data, the real payment terms at the end of 2010 got  close to 360 days in certain market segments.


A first and preferred solution  is the harmonization within national legislation of the revised EU Directive2000/35  which sets  payment term limits for the public sector. However, such initiative if adopted, will only reduce the magnitude of the problem  but not eliminate the private risk in its entirety.

It was Italy’s case which took this path already in 2002 through Decree 231, setting an interest of ECB+7%  in case of late payments,  procedure which was largely exercised in relation to the public health authorities. Other countries governments like  Ireland, Belgium, Poland, Portugal and the Czech Republic  have pledged to reduce this late payment practice, particularly used by public authorities. In Belgium the federal government has set up a special  "bridging loan" via a federal investment fund to finance late payments of all public authorities. In Spain: For 2009, the Instituto de Crédito Oficial (ICO) has set up a EUR 10bn liquidity facility for preferential loans in order to meet the liquidity requirements of small and medium enterprises. These funds are subject to co-financing rules so that, for example, 50 % are covered by ICO and 50 % by credit institutes. In the UK: the authorities have committed to paying invoices within ten days!!!. 

As far as Romania is concerned, similar measures cannot be implemented to soon for a simple reason: following the Agreement with IMF, the 2011 state budget deficit cannot exceed  4.4% and  3.0% in 2012. And as the budget is constructed on a cash flow structure, any un-planned supplementary payments would  represent a breach of the IMF agreement.  Thus, the question on how small and medium enterprises  activating in healthcare can avoid bankruptcy  is to be answered by looking at an alternative option of attracting the much needed liquidity. Under the current market practices, the public healthcare authorities receive a cost free extended credit for their purchases, credit coming mainly from the manufacturers and from banks as second option.  The percentage of financing is around 85% in favor of the producers, granted in the form of commercial credit at no cost while the banks participate mainly at distributors level, covering the difference. Pharmacies, in most of the cases, cannot afford financing costs.

The case study will analyze the solution found by the suppliers and creditors of the public healthcare system in Italy and  provide an assessment on the conditions  under which similar proceedings  could prove to be a viable solution in Romania’s case.



Legal overview

Over the years, many structured finance transactions (either securitization transactions or asset finance transactions) have been structured in relation to the Italian healthcare receivables. The reasons are several. On one side, the providers of healthcare goods and services usually are not paid in time by the relevant healthcare authorities and therefore, in order to gain liquidity, usually assign their receivables held with the healthcare authorities. On the other side, due to the legislation that provides for high interest rates on late payments, the banks and other investors have had the interest on carrying out different kind of transactions. After a brief description of the Italian healthcare system, we will analyze the so called “transactions with regional authorization “  and  another model- the so called  “raw healthcare receivables” transactions, which registered significant volumes  in the Italian market practice, by analyzing the legal means through which it was possible to recover such receivables.

Italy’s national healthcare service  “NHS” is regulated by legislative decree no. 502/1992. The reform introduced by decree 502/92, as amended from time to time, provides for a three-tier system for the healthcare service, as outlined below.

State level - The central government provides a national legislation limited to very general features of the NHS and decides the funds to be allocated to the single regions according to specific criteria (density of population, etc.) for the NHS.

Regional level -The single regions have to adopt provisions regulating the specific features of the healthcare assistance. Each region has to approve the regional healthcare plan and has to provide the allocation to the Healthcare Authorities (as defined below) of the relevant quotas of state allocated funds . “Local” level: Within the territory of each region different entities operate, Healthcare Authorities  which provide healthcare services to citizens (either directly or through accredited private structures) and use the funds allocated by the regions to pay their providers of goods and services.

Basically the so-called healthcare receivables are the receivables claimed by the Healthcare Providers for the healthcare services or goods provided to the Healthcare Authorities.
For reasons that are better specified below, the Healthcare Authorities usually pay the relevant Providers with a certain delay (which could change from region to region). Usually, when healthcare funds are allocated, in the national provisional budget, the central government underestimates the amount of healthcare expenditure. Since the central government does not provide regions with enough funds, regions are not able to provide enough funds to Healthcare Authorities, and payments to the Providers are delayed. Since the Providers need liquidity, they usually assign their receivables toward the Healthcare Authorities. To deal with all the above issues, Italian market  practice has been developing an alternative system of financing through securitization and asset finance transactions of Healthcare Receivables.  

Transactions with regional “authorization” are those transaction where the relevant region provides for an “authorization” to the transaction.  An example could be the approval of specific resolutions issued by regions setting forth some criteria and/or establishing some procedures for the Healthcare Authorities to issue the above mentioned certifications, the settlements agreements to be entered into by Healthcare Authorities and Providers and undertaking to reimburse to Healthcare Authorities part of the certified and settled receivables (or the relevant financial charges). The purpose achieved in this case was that the Providers have been facilitated in finding national and international market players that, thanks to the regional “authorization” of the transaction, could have an higher degree of certitude in relation to the Healthcare Receivables they were interested in purchasing.   Another type of transaction were the transactions concerning healthcare receivables which are object of judicial proceedings. As mentioned above, a Provider (or an assignee of its Healthcare Receivables) could commence a judicial proceeding to obtain the payment of its claims. Whenever a debtor (like an Healthcare Authority) did not fulfill its payment obligations, a creditor (like a Provider) could  commence legal proceedings before the competent courts and jurisdictions to recover its claims. As a general matter, the creditor had to start a legal action for the ascertainment of its substantive rights, in order to obtain an enforcement title i.e. a title empowering to levy execution. The judicial proceedings provided for by the Italian Civil Procedure Code are (i) the ordinary proceeding and (ii) the injunction proceeding. In general, a creditor may always go through an ordinary proceeding to recover a payment,
whenever conditions are not met to commence other judicial procedures to accelerate or facilitate the collection process or whenever for strategic reasons the party prefers not to go through a summary proceeding.

Facts on late payments
According to Corriere della Sera publication from August 10th , 2010,  following to a Report of the Court of Auditors of the financial management of the regions, citing Assobiomedica numbers, the days payables records were registered by regions  Calabria with 809 days, Mouse  715 days, Campania  with 648 days and Lazio with 419 days. In 2009, Italy’s regions average days of delayed payments  topped 316, compared  to 308 days in 2008 or 302 in 2007.


The similarities to the Italian system of  the Romanian health care system along with its issues  are obvious.  The  “Regions” role can be assigned to the National health Insurance  House and its local arms - the county insurance houses. As for the Italian “ Local Health authorities”, these can be identified  with the Romanian hospitals and pharmacies receiving money for the health services they provide to the insurance houses. As far as the legal framework is concerned,  the National Health Insurance House does not allow the assignment of  public health accounts receivables  without its prior written consent. Such consent would be granted on an individual base,  request coming from the health provider wanting to assign its receivables.  However, the administrative path is lengthy and at the end does not assure a positive decision as qualification criteria are not transparent. The regulations containing the relevant provision for these proceedings are Government Decision no. 262/2010, Art. 141 and NHIH order 686/2010. In terms of the NHIH willingness or acceptance to pay interest for the late payments, above regulations contain  no such provisions meaning that EU Directive 2000/35 was not transposed into the national legislation. Even under these less favorable legal circumstances, the interest of health providers, especially of the small and medium sized enterprises,  to transform long outstanding receivables into liquidity is very high .  But, as mentioned before, pharmacies are vulnerable in negotiations and fear of harming their relations with the insurance house. In the same time they have limited experience and  resources when it comes to initiating legal proceedings to recover debts. Because of all these aspects, pharmacies would rather prefer the type of transaction  where  assignments of receivables have the consent of the Insurance house.  As regards to the assignment of public hospital receivables, there is no legal provision regulating such transaction.

In Romania, the first signs of interest in financing the health care receivables appeared in the spring of 2010  when Nomura made a financing proposal to the National Health Insurance House. The deal involved a cash injection of  500 million Euros and a credit facility rolled for five years.  The proposal did not involve a government guarantee letter, payment of penalties or interest on the NHIH but the 25% cost burden would have fallen on the pharmacies. 

"To me it seemed that the proposal is advantageous to both players in the market because currently there are countless applications for assignments of receivables by the market," said Mr. Duta, the NHIH president, adding that he expects also other investors to participate at this mechanism of factoring. The Insurance house would not initiate a public tender for these services but rather leave the freedom of the providers to choose the best option for them. However, this statement comes in contradiction to the legal framework regulating the assignment of healthcare accounts receivables (Framework agreement HG262/2010 and NHIH order 686/2010); the NHIH ambiguous position is easy to be spotted out . Mr. Duta mentioned that the NHIH received also other offers requiring state guarantees and interest paid by the National Insurance House, affecting their budget.   

In the mean time, other investors developed customized products, ready to offer viable commercial alternatives to the providers of pharmaceutical products, with the participation of pharmacies, distributors and manufacturers. The ideal transactional model would be a liberal one in which the NHIH would not intervene in the selection of investors nor impose administrative restrictions on the creditors but rather leave the players  the freedom to choose what’s best for them. 



The pressure cooker in which healthcare providers in Romania strive to survive, lacking the much needed liquidity, must soon open its valve  either following to a Government  cash injection in the healthcare system or through the development of an alternative mechanism of structured finance transactions.

Unless the legal framework is changed in order to insure a transactional fluency of the health  receivables assignment, case in which the County Insurance Houses would only be notified instead of being asked for permission, a good probability exists as in Italy’s case to assist to transactions without the NHIH ( Region) consent. Under such circumstances, the NHIH will have the freedom to choose the amiable way of paying its debt toward the new owners of the receivables or try to defend its position in the court of justice.

In any case, there is no possibility for the current system to continue at this pace, one or the other solution will have to be adopted soon. The recent shock waves in the health care business sector  triggered by Relad International insolvency raised again, now more than ever, the question about finding new solutions to mitigate creditors risk associated with late payments.

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