- Financial challenges in the healthcare industry have fueled the U.S. Centers for Medicare and Medicaid (CMS) to require companies to provide a payment guarantee to secure or renew contracts.
- Standby Letters of Credit can provide the same assurance as an escrow account or a surety bond, without upfront payment so companies can preserve capital.
- SBLCs support growth for healthcare innovators such as those offering new medical devices, diagnostic or telehealth platforms, niche provider networks and other advancements.
Innovations in the healthcare industry are making tremendous strides to better serve populations. But getting to market can be challenging for companies offering new medical devices, diagnostic or telehealth platforms, niche provider networks and other advancements. Growth may rely on securing contracts with insurers such as the U.S. Centers for Medicare and Medicaid (CMS) – yet CMS insists on upfront guarantees that may be cost-prohibitive for startups.
CMS requirements are understandable given they support a huge volume of medical claims. In 2023, they paid out more than $1 trillion for Medicare and $872 billion for Medicaid.1 With year-over-year double-digit increases in total national health expenditures, CMS is increasingly wary about whether new healthcare companies can meet their commitments.
When CMS requires a payment guarantee such as a surety bond or escrow, how can healthcare innovators secure contracts while preserving working capital?
A Standby Letter of Credit (SBLC) can make all the difference.
What is a Standby Letter of Credit?
An SBLC is a bank-issued payment guarantee that reduces the need for pre-payments, deposits and escrow accounts. Instead of companies having to pay cash up front, the letter of credit provides assurance to all parties that commitments will be fulfilled. That makes it an ideal strategic financial tool to help healthcare innovators secure CMS contracts or renegotiate better terms.
What’s fueling CMS payment concerns?
Financial challenges in the healthcare industry are making CMS more reticent to grant or renew contracts with young companies. Their demand for an upfront payment guarantee aims to help offset uncertainty about an organization’s ability to:
- Serve CMS populations – CMS is wary of innovators entering the market with little or no track record. They worry about a company’s financial sustainability to consistently serve their target audiences, and whether they can cover all proposed service areas.
- Pay Medicare/Medicaid claims – Cost issues commonly affecting the healthcare industry are amplifying concern about how well companies can meet financial obligations. For example, “medical-loss ratios” are rising due to patient care utilization being higher than expected, according to a Deloitte report.2 And inefficient manual processes for managing claims are exacerbating the problem, creating significant revenue leakage, “with as much as 15 cents on every dollar earned going uncollected.3”
- Demonstrate improved outcomes – New companies often have limited data to prove their value via performance metrics, such as benchmarking innovative care solutions against existing ones.
Even if venture-funded startups are prepared to meet these operational challenges, making a large pre-payment can put a burden on cash flow. That’s where a Standby Letter of Credit can make a valuable difference.
Strategic advantages of using a Standby Letter of Credit
Optimizing cash flow is critical for fast-growth companies, and an SBLC makes it easier to preserve capital while meeting the CMS requirement for a payment guarantee. Instead of paying deposits for escrow or a surety bond, a letter of credit issued by a bank provides assurance that commitments will be fulfilled.
An SBLC can help companies improve contract negotiations, and enrollment or revalidation processes. It assures CMS and other health insurance networks that medical billing and claims will be reimbursed, even if the company becomes unable to meet those obligations. It’s similar to a surety bond because the SBLC guarantees a third party will pay if the contractual party cannot.
This payment assurance can also enable solution providers to participate in CMS Shared Savings Programs.
What kind of companies can benefit from letters of credit?
A wide range of innovation economy companies can take advantage of Standby Letters of Credit, including:
- Technology innovators such as telehealth or claims payment platforms that need to integrate with Medicare Advantage plans.
- Medical device companies like those providing remote patient monitoring, point-of-care testing equipment or mobility devices.
- Specialized provider networks that serve Medicare Advantage or niche markets such as home-based care, mental health, specific high-cost conditions and more.
- Healthcare analytics solutions focused on Medicare/Medicaid populations, performance-based outcomes and other metrics.
Standby letter of credit success story
At SVB, our Global Trade Finance experts can tailor SBLCs to the unique needs of our clients. As an example, a healthcare provider network wanted to negotiate better terms with CMS, but the agency required a payment guarantee. SVB issued an SBLC that helped our client successfully improve their CMS contract, without having to pay upfront and disrupt their cash flow.
How to get started with an SBLC
Standby Letters of Credit can give healthcare innovation companies more flexibility to navigate growth. SVB provides unique advantages by combining our expertise in SBLCs and CMS requirements, with deep understanding of startup needs and challenges.
Learn more about how SVB Letters of Credit can help your business secure contracts with insurance networks.