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The looming deadline: Healthcare providers’ repayment of Accelerated and Advance Payment Program loans

July 28, 2020

CMS’ Accelerated and Advance Payment (AAP) Program has been a lifeline for healthcare providers during the COVID-19 pandemic. But repayment of these loans begins in just a few days on August 1 - adding financial stress for many troubled hospitals. For this episode, we are joined by Denise Burke, a partner in Waller’s healthcare compliance and operations group who advises hospitals and other healthcare clients across the country, and Jordan Shields, a managing director with Juniper Advisory, a Chicago-based firm focused on advising non-profit hospitals and health systems on strategic partnerships. 

Here is a transcript of the conversation:

Morgan Ribeiro 
Welcome to PointByPoint. This is your host Morgan Ribeiro. On today's episode, I have asked my colleague, Judith Byrd, who is the executive director of Waller's multidisciplinary healthcare department to moderate our discussion where we will be looking at CMS' Accelerated and Advanced Payment Program which extended funds to healthcare providers during the COVID-19 pandemic. And quickly these loans will need to start being repaid on August 1. So this is a very timely issue and I am excited to have Judith moderate today's discussion.

Judith Byrd 
Thank you Morgan. Today I'm joined by Denise Burke, a partner in Waller's healthcare compliance and operations group, who advises hospitals and other health care clients across the country. Along with Jordan Shields, a managing director with Juniper Advisory, a Chicago-based firm focused on advising non-profit hospitals and health systems on strategic partnerships. Our focus on this episode is about an extremely timely issue impacting healthcare providers. To set the stage, CMS' Accelerated and Advanced Payment Program has been a lifeline for healthcare providers during the COVID-19 pandemic. The program which historically supported hospitals during localized natural disasters was dramatically expanded at the start of our current crisis to offer providers immediate cash infusion. Hospitals could receive six months Medicare revenue as a loan with critical access hospitals eligible for even more. Repayment of these loans begins in just a few days - on August 1. To kick things off, Denise, could you give us a quick overview of all various types of relief funds that were made available to providers?

Denise Burke
The funds we're talking about today were actually loans to providers in the Medicare Advanced program. But since that time, Congress has appropriated over $100 billion through the CARES Act, and an additional $75 billion through the Payroll Protection Program. Out of that $100 billion, HHS allocated that in different tranches that we've been calling them. There was a general distribution of $50 billion that originally went to Medicare providers, and then there was an additional $15 billion that was allocated to Medicaid and CHIP providers. In the last couple of weeks, others were added to that tranche, even if they did not take Medicaid or CHIP money. And then they have what they call targeted allocations that went to specific areas. They did $12 billion to high-impact hospitals, they did $11 billion to rural health care providers, which includes about 4,500 rural health providers. There was $5 billion to skilled nursing facilities, $13 billion to safety net hospitals, and $500 million to tribal hospitals and clinics. So, you know, I'm not used to seeing this type of money around, it seems as if the government has been printing money at times, and to see $100 billion allocated and distributed with as little paperwork as we've seen has been certainly something unique in my career. But I do have to say that I've never believed we could distribute money that quickly. So despite the challenges, and as most of you probably know, the constantly changing rules that have come with this money, I'm very happy that we were able to get money to providers as quickly as we have.

Jordan, while CMS' Accelerated and Advanced Payment Program is designed to stabilize hospitals in the short-term. With COVID-19, we've come to realize that it is not short-term disruptive. What is this Medicare repayment issue all about? Who took the funds and what is the repayment situation?

Jordan Shields 
This issue really stems from CMS wanting to respond as quickly as possible back in mid-March, when we remember things were just moving so incredibly quickly. This was the first relief that came out and to get it to hospitals quickly, they used an existing program. The AAP program had been designed for natural disasters - hurricanes and earthquakes, for example - as a way to get providers money very quickly when there were collection disruptions. It allowed those hospitals to bridge the period of the disaster and the program is designed for that. Hospitals can apply for 50% of their prior year's Medicare reimbursement. They have four months of grace period before the government begins recouping. From there, the existing Medicare reimbursement and that recoupment takes place over eight months. There are hardship exemptions. So if a hospital needs to delay their repayments beyond those eight months, they can apply for that. But there's a very onerous interest rate of 10.25% associated with any funds that are are not repaid or not recouped during the month period. The program works well in those situations. In hurricanes and earthquakes that are finite and things are back to normal at some point and the gap has been bridged. But a pandemic is very different than that. It's not a slowdown in collection. It's a disruption of the healthcare space, the provider space going forward, and the program just isn't designed for that. So one of the big issues is that we have significant declines in forward-looking revenue and the ability for the hospital to repay the loan over that period of decreased revenues going forward is very difficult. It's not that you get to the other end of the four months and things are back to normal. As we're seeing today, you get to the other end of the four months and you very well may may have another non-essential services cut-off. And across the board, we're seeing revenue declines. And if we think back to 2008, and the recession, which we still don't know quite where we are as an economy, but it seems likely that there's going to be some level of systemic recession for an undefined period. And we think back to 2008, it took hospitals three years to get back to their pre-2008 revenues from that last recession. So we have a series of issues - none of which are the fundamental sort of reasons that this program was designed to address.

Denise, you may want to jump in here. With the repayment of pandemic-related loans beginning in August, is that a tipping point for some hospitals in already tenuous financial positions?

It could be a tipping point for some organizations. For most of the organizations that we work with, it's not a hardship yet. And they're not planning on just writing a check back to CMS. They are planning on keeping the money in the bank and using it as needed as the reimbursements are reduced going forward. But for some providers that were struggling before it started, they may end up in a problem when they have to pay this money back quickly. Additionally, we found out yesterday, First Coast, the Medicare Part B Medicare administrative contractor for Florida announced that for the Part B providers and the physicians they will not be given a line-by-line remittance on the three payments which will make it difficult for some physician groups to administer their personal productivity compensation plan. So as of yesterday, we had some physicians start thinking that they may want to just repay it in a lump sum if they don't need it so that it won't cause a hardship on them in their regular administration of those productivity plans.

And I know hospital associations, including the Federation of American Hospitals, are pushing for relief on their AAP loans, recognizing the pressure payments will place on facilities that are struggling financial, clinical and operational disruption amidst this ongoing uncertainty. There have been rumors for weeks that Congress might reverse the repayment of these funds. The uncertainty continues to persist. But what are the chances of that happening before August 1? What are you hearing, Jordan?

The chance of anything happening before Aug. 1 is low. We don't know exactly what's going to come through Congress but another bill by Aug. 1 - another pandemic bill, not just for healthcare - is in question. The likelihood of some relief is slightly higher, I think there's a fairly good chance that the 10.25% interest rate on funds that haven't been repaid by the end of the loan period, I think there's a reasonable chance that will be lowered. All of the providers that I talked to hope that there will be relief. I think in March when they took these loans, they had high hopes. But it's not clear to me that there will be relief.

I think that there will be relief at some point in the form of extending the amount of time that they have to repay the loans and possibly not offsetting at all at first. When things were issued, we had no idea how long the pandemic would last. We still don't, but as it's still happening, the repayments are coming due right about the time that some of the hospitals are actually seeing an influx of patients and that's likely to continue. So I do think that they will get some relief in the repayments. I think it's very unlikely that it will happen before August 1. And if you think about the people that may want to repay in a lump sum so that the government does not start recouping, they need to do that in payments, because the government's got to have time to process the paperwork. So if they're not careful, and they do it too close to the deadline, they will both pay the money back and recoupments will start. That would probably get worked out, but it would be an administrative nightmare and not a place that you want to be in from a financial position. So I think we're too late in the game to give too much relief before the recoupments could start, but I do think it will happen shortly after that. I do know that it's in some of the bills to work on the repayment timeline. I will say there's been a rumor out there that our government might just waive the payments and turn these loans into grants. I don't think that's going to happen at this point. When those rumors started, it was before the government distributed the $100 billion in relief. And that $100 billion has some fairly tight terms and conditions tied to it and a pretty onerous application process flow. It just would seem inconsistent that they would forgive money on these loans without collecting the same type of data and getting the same types of terms and conditions.

Jordan, Juniper Advisory has some extensive experience navigating liquidity challenges with your clients. How does cash flow and liquidity look for different types of hospitals across the country and who's most at risk in this current environment?

Just to be clear, everybody took these loans and it was the right thing to do in March just given the uncertainty. So looking at who took loans doesn't give you a window into who's most at risk right now. As Denise shared, there are very well capitalized systems that have this money in the bank. They're sitting on it and they're not going to have an issue. The hospitals that had low days of cash on hand and weak margins going into the pandemic, they are in a tough spot right now. The other relief programs that Denise described have been very helpful. They help organizations bridge the non-essential services (stoppage that created) devastation to hospital financial operations. But now they're looking forward at a long road. And they didn't have cash going in their balance sheets look better today, because in large part, they have a very substantial loan, which can be 50% of the prior year's Medicare reimbursement sort of sitting there on their balance sheet. But unfortunately, that 50% is going to be recouped by the government over the next year (over the next eight months), unless there's a change. So maybe, maybe put another way, I think the guidance from the American Hospital Association this week puts it in perspective. They're projecting that median operating margins could be negative 7% this year. And if we think about, I these struggling hospitals going in, they're going to be below that, that negative 7%. They're going to have pretty significantly negative EBITA. And they don't have a cash cushion to offset their revenues as the recoupment starts. And they're facing a real cliff situation. So they're very hopeful that there'll be new grants, but the liquidity situation is going to be difficult for those rural facilities and standalone facilities in mid-size markets.

Is there any particular advice you would provide to hospital boards working through this?

Yes, absolutely. There are really three things that that I'm telling my boards right now. The first is to step up internal reporting. The finance committee should be looking at weekly liquidity reports, particularly use of cash on hand and having their CFOs prepare for them very clear reports on what their burn rate is on that cash. And we're seeing some pretty big issues and part of the value of those forecasts is that there are some big ins and outs in the best year for hospitals. Income statements can be lumpy in the best of times and hospitals that haven't properly anticipated both those inflows and outflows are finding their cash (has) moved dramatically. And the Finance Committee to the board should be on top of that. The second is scenario planning. So management teams should be preparing regular updated pro formas on various scenarios for the board. So if pro MX makes it through Congress. What will that mean to our financial operations? And where will that position us? If we see revenue declines of 8%, 10%, 15% through the end of the year, what will that mean to our cash? And then the third is really the most important. And it's putting tripwires in place now so deciding as a board at what point, at what cash level is the organization comfortable and at what point do they need to take aggressive action to make sure they're prepared in case their cash continues to slip so that this might be putting a tripwire in place where if cash gets below 100 days or they experienced three months of consecutive losses, they will hire someone like Juniper or hire another advisor to take them to market and assess what their other alternatives are. What you don't want to do - and the biggest risk here - is sort of a boiling pot issue where you're slowly week by week losing liquidity, days catch or dropping, but it's a slow move. And you're hoping that operations turn around in a couple of months, and you start digging out, and what can happen there is that the organization just finds themselves in boiling water before they realize that it was too late to step out of the pot.

I completely agree with Jordan. A lot of our rural hospitals received the extra distributions. And in many of those places, they have not seen the virus surge, so they haven't had the extra expenses. And some of them didn't even have the decreased admissions that cause some of the losses from preserving PPE. So many of those facilities do have balance sheets that look better than they have in years, yet the underlying issues that were causing their losses before the virus haven't changed, and it's really hard to talk about making a change or making a transition when your balance sheet looks that good, yet it's so important. Many of these facilities have not had the financing to go out and get the expertise and to explore the options on ways that they can actually maintain services for their community into the future. And this actually may be an opportunity to do that if they will put the checks in place that Jordans talking about and be proactive in realizing if there's a situation that's going to be a permanent situation and trying to make some changes as hard as that is for people. The toughest situation we see is when a hospital sort of implodes quickly. And when that happens, the community loses all of its services. Even the doctors generally will take a job in a different town that makes an offer and so the people that can assess early and see that that's going to happen, they have the opportunity to look for partners to save the hospital. If that can't happen, they can look for other sorts of services that could be preserved in the community. And they really do their community a great service by looking ahead, making a reasonable plan to preserve as many services for the community as you can. And I think we can say from all the hospitals that have closed in this country in the last 10 years, the system is just not set up for some of those independent hospitals to make it. And as difficult as that is to that, particularly when your balance sheet looks really good, this may actually be the solution for some people, they have been given the money by the government that can help fund their transition.

Finally, the pandemic is far from over, and we don't have a crystal ball. But do you expect other kinds of relief to funnel down to health care providers in the coming weeks? So what could that look like?


Well, I'm not sure what's going to happen. I do think that Congress is going to provide additional relief. We all know they're talking about it right now. But right now it seems like the priority is more giving money to state and local governments, money for schools, money for additional testing and small businesses. While healthcare providers may get additional distributions in the future, I'm not sure that they are going to be the priority and what's being discussed right now. So I think we have to be prepared to just work with that and what's already occurred.

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