Merchant Cash Advances Surface in Health-Care Bankruptcies

Liquidity strains and shrinking access to traditional bank credit are driving distressed health-care providers to seek out merchant cash advance lenders.

The revenue-based lenders are increasingly lending to small and mid-sized health-care providers—including independent medical practices, treatment facilities, and medical equipment suppliers—facing liquidity troubles, pandemic aftereffects, uncertainty over government reimbursements, and limits on using Medicaid receivables as collateral.

MCAs provide quick capital to businesses in exchange for a portion of future sales. Because these agreements aren’t regulated like traditional loans, lenders can impose higher interest rates.

“MCA providers sometimes offer more attractive terms for health-care facilities, even those with high Medicaid concentration, because they see the government as a reliable payor,” Brady Richardson, vice president at boutique investment bank SC&H Capital, said.

Recent changes under the GOP tax law will impose additional eligibility requirements and Medicaid cuts, creating further challenges, especially for providers that rely on government disbursements.

Quick cash with high interest can hasten providers’ troubles. MCAs were rare in health-care bankruptcies until recently, even as they appeared in other bankruptcies. But data from consulting firm Business Research Co. show health care accounted for 15% of the global MCA market last year, a figure that’s likely to keep growing.

Independent MedEquip in Alabama and Prestige Healthcare Resources in Maryland indicated in recent court documents that they relied on MCAs during liquidity challenges to sustain operations. Both later went bankrupt.

The structure of revenue-based financing conflicts with the anti-assignment laws that apply to government receivables, said Kara Bruce, a professor at the University of North Carolina at Chapel Hill.

“Medicare and Medicaid statutes prohibit companies from selling the money they’re supposed to receive from those programs. There are ways lenders work around that, but it typically involves the money going first to the health-care provider and then to the funder,” Bruce said. “That puts these agreements in clearer tension with the Medicare and Medicaid anti‑assignment statutes.”

Prestige said it filed for bankruptcy after a lender claiming rights to its future receivables directed the Washington, D.C. Medicaid office to send payments, diverting about $500,000 the provider needed to operate. Its attorneys at Tydings & Rosenberg LLP didn’t respond to emails.

The Centers for Medicare & Medicaid Services said in a statement that, under federal Medicaid regulations, payments for covered services are “generally made directly to the enrolled provider.”

MCA Growth

Government reimbursements that traditional lenders might view as uncertain are sometimes seen as predictable revenue for MCA lenders.

Even at risk of a provider bankruptcy, MCA lenders “are willing to take a bet” given the high interest rates they demand, Richardson said.

“MCAs are willing to take more risk than traditional lenders,” said Keith C. Owens, a bankruptcy partner at Fox Rothschild LLP. “Distressed borrowers that can’t find financing from other sources will look to MCAs because their immediate needs for working capital, have been rejected by traditional lenders, or have few assets to pledge as collateral.”

MCA transparency is limited until a company initiates legal action or goes bankrupt.

Ravi GI Associates, affiliated with the University of Pittsburgh Medical Center, said it took on several MCAs before entering bankruptcy, but later struggled to keep up with daily and weekly debits. Lenders initiated garnishment.

The Global Cancer Research Institute said it couldn’t pay due to high interest rates, prompting one lender to levy its bank account. In another case, an Orlando-area fertility clinic said the payments had “suffocated” its operating income by about $20,000 a week.

US health care spending, which reached $5.3 trillion in 2024, is attracting lenders, said Ryan Rosett, co-founder of fintech company Credibly, which provides MCAs. Credibly faced a complaint from Independent MedEquip to stop collection efforts against an executive.

He said alternative lenders are a “natural fit” in health care.

“Payments flex with collections, so a slow reimbursement month doesn’t become a crisis for either side,” he said.

To the extent those payments are cut, “that’s going to put more pressure on health-care providers to figure out different ways to bridge the gap,” Owens said.

Economic Constraints

Rising operational costs and tariff-driven supply pressures also have providers looking for quick cash infusions.

Providers often operate on thin margins. Government staff cuts and administrative delays also slow reimbursements. Medicaid and Medicare plans drove the most professional claim denials last year, according to MDaudit.

“There’s a cash management cycle issue with health-care systems,” Richardson said. “It takes a long time to convert actual reimbursable services into cash.”

Traditional lenders often examine a company’s “payer mix” to determine shares of privately insured and Medicaid patients.

That’s important because providers treating privately insured patients can receive more funding than if they treat lower-income patients, said Christopher Whaley, a Brown University School of Public Health professor.

Lender Challenges

Creditors can have an enforceable security interest in government receivables, but they can’t directly collect them due to Medicaid and Medicare anti-assignment rules.

Lenders can set up “lockbox arrangements” in which they have control over a debtor’s receivable revenue stream.

Assuming the lender has a valid, perfected security interest in those accounts, the receivables essentially become collateral, Owens said.

Some MCA lenders fail to file the required financing statements promptly, giving them lower priority, he said.

Additionally, bankruptcy courts often find MCA security interests unperfected or unsupported for several reasons, including the nature of the collateral and structure of the transactions. Another issue in bankruptcy is whether MCAs should be recharacterized as disguised loans instead of sales.

Sometimes, debtors enter bankruptcy with a few MCA arrangements. When a business can’t keep up with those payments and faces aggressive enforcement, it either refinances at a great cost or gets a new funder to pay off the old debt, Bruce said.

“When those snowball on top of each other, you get a death spiral where these companies walk into bankruptcy with six, seven, or eight MCA transactions,” she said.