Investment in the healthcare industry requires careful consideration, as it involves numerous distinct areas of the law. Venable's Private Equity Investment in Healthcare webinar series explores the unique issues and timely developments that shape deals within the industry.
In the fifth webinar of this series, partner Ari Markenson moderated a conversation between partners Ellen Berge and Andrew Bigart about legal and regulatory considerations impacting payments in the healthcare industry. Here are the key takeaways.
Numerous Opportunities for Fintechs in the Healthcare Space
The healthcare space is currently ripe with opportunities for fintech companies to offer their services. As healthcare providers move away from paper bills and checks and toward electronic payments, fintech companies can share solutions that streamline the payments process and improve the patient experience. For fintechs looking to take advantage of these opportunities, it is critical that they understand the various payments models, intermediaries/stakeholders, financial and regulatory risks, and compliance obligations.
Fintechs as Payment Intermediaries
The healthcare payments ecosystem is complex, involving multiple key players and payment intermediaries. Most fintechs in the healthcare space will act as payment intermediaries. There are a variety of payment models, and the intermediaries’ role varies, depending on which model they adopt.
Card-Based Model
In a card-based payment model, merchants may receive payment services from banks or various payment intermediaries that partner with banks to process payments. One option, common among software companies that have existing relationships with medical providers, is to act as a referral source that connects the software company’s clients with a sponsor bank or other payment intermediary. A more complex option would be for the software company to step into the role of payment intermediary, such as by operating as a payment facilitator sponsored by a bank partner. This approach gives the payment facilitator more control over the merchant relationship and revenue, but imposes heightened regulatory compliance requirements with respect to card network rules, anti-money laundering, and consumer protection.
Automated Clearing House (ACH)-Based Model
In an ACH payment model, a bank can issue instructions to electronically debit or credit accounts and transfer funds between accounts, banks, or credit unions. Fintechs that operate as intermediaries in the ACH space are called third-party senders. Like payment facilitators, the third-party sender establishes the customer relationship and serves as the intermediary between the customer and the bank that facilitates the ACH payments.
Mitigating Risks in Processing Payments
Processing payments raises a number of compliance considerations. Policies and training should reflect the entire risk management life cycle. On the payments acceptance side, the payments company will be expected to underwrite its customers and perform customer due diligence. The scope and degree of diligence will depend on various facts and circumstances; for example, online transactions are likely to present a higher degree of risk than in-person transactions.
Any party that engages in money transmission, or regulated activity that involves the receipt and transmission of funds, must register with the federal Financial Crimes Enforcement Network (FinCEN) and obtain state licenses. In recent years, payments companies have sought to mitigate FinCEN and state registration and licensure requirements by partnering with banks to transmit customer funds through custodial “for the benefit” (FBO) accounts.
The Bottom Line
Whether you’re a payments company or you’re looking to invest in a payments company, it’s important to understand the regulatory expectations for your products and services. This includes compliance with network rules, federal and state laws, and potentially federal registration and state licensure requirements. Moreover, for software companies and others with existing customer relationships, incorporating payments into an existing suite of services must be done carefully to ensure that the software company maintains control over its customer relationships and is not disintermediated by bank partners or other payments services providers.
If you are a fintech looking to enter the healthcare space or an investor looking to invest in a company, we invite you to learn more about Venable's Healthcare, Banking and Financial Services, and Private Equity teams.
In the next session of this webinar series, members of our Healthcare and Mergers and Acquisitions teams discuss how corporate practice and fee-splitting prohibitions affect business structures and operations, particularly in the practice management space. If you are a healthcare investment professional and would like to learn about future sessions, please email Ari Markenson at ajmarkenson@Venable.com.