Shakespeare’s Shylock wanted to exact his pound of flesh, but the Court warned him, shed no drop of blood. The court’s and consumer’s attitude to those that charge interest has not much improved since the days of Sharespeare. Usury laws were enacted with the foregoing philosphy in mind.
Why do health care providers have to care about usury? They are not bankers or loan sharks! So long as a health care provider charges an insurer for services rendered to its beneficiaries or insureds, the issue of credit extensions and interest rates will be purely academic because the insurer will ignore the charges. However, once providers start accepting cases on a lien basis, or routinely granting cash paying clients the ability to defer payments over several months, the issue of what interest rate and how to structure the credit transaction becomes important. Your patients can rightfully question whether your interest charges are legitimate if you do not follow the required guidelines. This memo assumes that the health care provider is not in the business of lending money, but rather extending credit for the purchase of, and deferred payment for, health care services. As such, the extension of credit pertains to "personal, family or household purposes", which is a threshold determination for the application of usury and written requirements for credit agreements.
Do I need a written agreement to charge interest? No. First, so long as the extension of credit is for personal, family and household purposes, it is an exempt transaction for "credit agreement" purposes of RCW 19.36.100, et seq. Second, RCW 19.52.010 allows charging interest in the absence of agreement, but limits the amount to the current legal rate of 12% per annum. Note that this is simple interest, not monthly compounded interest. If you charge 1% per month, add it to the principal and charge another 1% the following month, you are compounding and the annual rate will exceed 12%. The one exception is when the performance of the contemplated agreement will exceed a year, then the statute of frauds requires the "agreement" to be written. We recommend you use a written agreement for the imposition of interest in ALL cases.
If I use a written agreement, can I charge anything I want?No. Unlike business or commercial transactions, the type of personal and family transactions engaged in by providers means that even with an agreement, you are limited to the higher of 12% per annum or 4 percentage points over the 26 week T-bill rate in existence in the month preceding the extension of credit. Many agencies can provide you this percentage figure. Once again, this is simple interest and not a compound calculation so be careful about adding interest to principal and computing interest on that new principal amount.
Do I need to comply with Regulation Z? So long as your credit agreement does not contemplate 4 or more installments, then you do not need to comply with the federal Regulation Z. If you are setting up deferred payment plans of longer than 4 months, then you will need to consult Regulation Z. Consult your attorney for compliance requirements. Do not confuse the difference between an agreement that "contemplates" 4 or more installments, versus an open end agreement in which the patient simply takes 4 or more payments to complete reduction of the balance.
Is there any difference between a late charge and interest? Yes. A late charge is incurred only if the patient fails to pay "at the end" of some period of time, generally monthly or quarterly. Interest accrues from the date of indebtedness until the date of payment. Hence, if a patient is sent a bill for $1000 on October 1 with 12% simple interest per annum, then when the patient pays on October 29th, the patient owes interest of $9.43, plus the $1000. If instead, you charge a late charge of 1% on any balance remaining as he new billing cycle begins, then a patient paying on October 29th incurs no interest or late charge. On November 1, then the patient owes a 1% penalty for not paying within 30 days. Because late charges are incurred only if the patient fails to pay within the specified period of time, e.g. within 30 days of billing, the late charge is wholly within the patient's control. Hence, courts have not interpreted late charges as "interest" for the purpose of usury. However, most billing programs do not make this distinction. Merely calling it a “late charge" and computing charges as if they were interest will not escape the requirements of the statute.
Is it possible to charge interest and "billing charges"? Adding billing charges to an account to which you are already charging interest is a gray area, without sufficient legal precedent to give any clear cut opinion. Generally, billing charges could be construed as "late charges" since they are imposed only if another bill is generated. On the other hand, if they are deemed administrative expenses, then billing charges could be challenged as disguised interest unless they represented an accurate pro rata cost of producing a bill. If you send out 500 bills at $3.00 per bill, but your administrative cost is only $500, then the $2.00 differential may be treated as interest. You should be cautious in this arena, and if you are challenged, it may be prudent to compromise the billing charges.
What are the penalties for usury? If guilty of usury, the best result is that any usurious interest is forfeit and you will be assessed attorneys fees and costs. However, if the patient has already paid some of the usurious interest, then you are allowed only your principal amount, and are subjected to an offset penalty of 2 times the interest charged, plus attorneys fees and costs. The amount of fees, costs and penalties could easily wipe out your bill and result in you owing money to the now ex-patient. It would be advisable to review your billing practices with your attorney and make sure you are compliant.