AHLA's Speaking of Health Law

Financial Stabilization and Recovery Options for Struggling Hospitals and Other Health Care Providers in the Age of COVID-19

May 21, 2020 AHLA Podcasts
AHLA's Speaking of Health Law
Financial Stabilization and Recovery Options for Struggling Hospitals and Other Health Care Providers in the Age of COVID-19
Show Notes Transcript

In this podcast, Andrea Ferrari, Partner, HealthCare Appraisers, speaks with Ross Norstrom, Property Analytics, USI Insurance Services, and Todd C. Baumgartner, Member, McDonald Hopkins, about insurance options for providers, hospital financing, the CARES Act and its application to health care providers, as well as additional funding and financial resources. The podcast also discusses the Presidential Declaration under the Stafford Act and its impact on nonprofit vs. for-profit providers and FEMA funding. From the Public Health System Affinity Group of AHLA's Hospitals and Health Systems Practice Group.

To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.

Speaker 1:

Welcome to today's podcast. I'm Andrea Ferrari. I'm gonna be moderating today's session. Uh, we're gonna focus today on financial recovery options for hospitals and other health systems in the wake of Covid-19. I have with me today Ross Nordstrom from u i Insurance Services, and Todd Baumgartner from the firm of McDonald Hopkins. I'm gonna ask them each of you questions, and then we're gonna wrap up at the end, uh, with, um, outlook for the future. I am going to start with Ross. So Ross, what, uh, what are the insurance options for providers at this time?

Speaker 2:

So, Andrea, at the, at the core of any property policy, we, we need to have an event that causes, and they're, they're called different things, either a direct physical loss or direct physical damage or physical damage. And this event must occur to trigger the policy coverage, which also includes business interruption and time element type of coverages. This this also applies to those extensions of coverage under the policy, which are included under titles like Civil and Military Authority, ingress and egress Extra Expense and contingent, inter contingent business interruption. However, where most, where most companies are able to get some recovery under a property policy is if you have an extension of coverage called communicable disease coverage or virus cleanup coverage. And to, to simply to trigger this under your policy, you need to have three things occur. And the first thing is you need to have actual and not suspected infection at your location. So you need to have actually had someone infected at your location. Number two, the location subsequently then is either shut down by a civil authority like a village or a town or a municipality and number or number two, one of your company officers. So your company officers are alerted that there is someone infected on site and for the safety of everyone, they shut the location down. And number three, the location when it was shut down, it then subsequently there's results in a loss of income or extra expenses used for cleanup. And those are the major components that most companies are using to get some recovery under their property policy.

Speaker 1:

So if your hospital has incurred extra expenses due to local, state, or federal government actions, um, can you recover from your property policy?

Speaker 2:

Andrea? Most property policies include an extension of coverage, which I mentioned before called civil or military authority. Now, typically this extension of coverage provides, provides recovery if there's physical damage that occurs, that is covered under the policy. And as a result, a civil or military authority orders your business to shut down their operations. And as a result, your business loses revenue. Um, typically this has been meant to cover things that are like floods or earthquakes, or if, let's say, um, the civil military authority needs your location as a staging area for something else, or there's damage and there's a civil engineer needs to be called in. That's how it's traditionally been, been, been covered. However, during COVID 19 shutdowns in various states, some insurance have tried to get recovery under this extension of coverage, unfortunately, with not much success currently. But to do that, there's two key elements that have to be met. So the first element that needs to be met is that the facility must have sustained physical damage. And number two, the damage causing the shutdown must be one that's covered under the policy. So those are the two main, those are the two main triggers of that coverage. And sometime, and right now with COVID 19, some insureds are trying to use that as a route for recovery.

Speaker 1:

So Ken folks just put in a claim for business interruption under their property policies for Covid-19 loss, or are there restrictions

Speaker 2:

In, in Andrea, in, in a lot of cases, there's some restrictions. Um, business interruption has to be triggered by a direct physical loss in your property policy. So the burden of proof on the, on the company making the claim is to prove that COVID 19 actually caused direct physical loss to their premise, which resulted in a loss of revenue. Now, there's two other potential avenues of recovery through ingre, through their ingress and egress extension and perhaps some others. But the, the key element for businesses to overcome is to prove that it actually caused direct physical laws. And that's, that's, that's one of the things that a lot of the publications are now. Um, they're now at, they're now basically outlining for various occupancies.

Speaker 1:

Are there other potential policies to recover from?

Speaker 2:

Um, there are. Um, I would say that probably the, the, the most, the most front and center line of insurance that is for recovery under COVID 19, it's probably workman's compensation and employer's liability coverage. If, if employees can prove that they, uh, contracted COVID 19 at work. Um, those are compensable claims under a workman's compensation policy. There are other efforts to try to recover under directors and officers. Um, those are a little more technical and a lot more difficult to do. But I would say that the, the one that really stands out is workman's compensation.

Speaker 1:

So Todd, what's the business environment like out there for acute care providers?

Speaker 3:

So, well, first off, Andrea, thank you for, for having me on, and thank you to a H L A for putting on this program. Um, I guess the, the environment I would categorize in one word is, is dreadful. Um, I've been practicing for 18 years, so I practiced through the 2008, uh, 2 20 10 financial crisis, which pales in comparison to this, uh, almost every provider we have is missing loan covenants, uh, uh, potentially missing loan payments. Cash is dwindling. We're constantly negotiating with banks right now. So it's, it's, it's terrible. Uh, the providers are losing 1.5 billion per day. There's been a 56% drop in patient volume, 254 hospitals of laid off workers. I think we've, we've seen in the news that there's a, a merger going on in Easton, Pennsylvania with the hospitals being acquired. And if this doesn't end soon, that that hospital faces closure. So, rural hospitals are already facing a difficult environment since the passage of the Affordable Care Act, but my understanding is that the, the latest studies by the American Hospital Association show that potentially a hundred hospitals could close as a result of the COVID 19 crisis. There was just a 250 bed hospital in Ashland, Kentucky that closed. So it's, it's, it's terrible. Um, I guess is is where there is. And, um, a lot of this is, is a result of the, actually most of this is a result of the suspension of elective surgeries, but, uh, and those are, have now been allowed in in most states. However, this hasn't been a springboard where you just turn on the faucet. This is more, I guess I would categorize it as a, a, a trickle coming in. Patients that that need elective surgeries are coming, are coming in, but it's not nearly the volume that it, that it was in February.

Speaker 1:

So President Trump's declared a national emergency under the staff for the ACT on March 13th, 2020. Um, what does that mean for hospitals and other healthcare providers?

Speaker 3:

So the, there, there has been money set aside by fema, I think it was$6 billion to, that they can apply for and receive public assistance. This was a big deal back in March. A lot of hospital providers have applied for that money, and, uh, they have until 30 days after the crisis ends to apply to fema. Unfortunately, as we all know, the crisis has not end and probably will not end for some, sometimes. So hospital CFOs should be, should be looking into making these applications to fema. There's also, uh, P P P P P E personal protective equipment that FEMA is distributing as well, that hospitals can apply for through fema.

Speaker 1:

What relief is available under the CARES Act for Healthcare Providers as another option in addition to, um, recovery under the Stafford Act?

Speaker 3:

So the, the CARES Act has been, has been fantastic for our clients. The, uh, the whole month of March, candidly was pretty depressing. Uh, we were playing defense, negotiating with banks, looking at furloughs, how to lay off employees. And then when the CARES Act was passed, it, it brought a lot of hope. So there, there are a number of programs which hospitals and other healthcare providers can take advantage of the HHS grants in particular, there was a hundred billion set aside, 30 billion was distributed in mid April. And then there's the Paycheck Protection Program, which is also known as the P P P loans, which have gotten a lot of media attention and basically took over my life. In the month of, of April, there's the emergency. This is actually before the The Cares Act, but there's the Emergency Disaster Relief Loans through the sba, the E I D L. And then there's also the, the Main Street Lending program, which is going to be coming online for, for entities. But, uh, really the, the immediate relief has been through the HHS grants and the Paycheck protection program, the PPP loans.

Speaker 1:

So you mentioned grants. How are those grants being distributed?

Speaker 3:

So there are, there are several traches. So the government is, providers are running outta cash. The government had to get cash immediately into the hands of providers before they started to default. The last thing you would need are healthcare providers defaulting during a period when we need them the most. But cash was dwindling. We're in a nationwide liquidity crisis. So 30 billion was distributed in mid-April, and then it was just brought to your account and it was based on what your Medicare re reimbursements were in 2019. And there was an attestation process through this. And you had to agree to certain terms of conditions, which were very confusing and very, um, caused a lot of angst with the, with the clients cuz the money, the money came to you and then you had to sign terms and conditions. So it was almost like they were just dumping money out to the healthcare providers and then asking for it back if you didn't think you qualified for. And there was a, a very confusing attestation page where you had to certify that this was, you were impacted by COVID 19 and that the money would be used for covid Covid 19 related patients. So a lot of providers weren't necessarily on the front lines, like a hospital where they're in an ICU looking at, you know, treating patients with, with COVID 19. But there were still dramatically impacted by the drop in electric procedures purchasing P P E. So there was a clarification that came out in late April, mid-May that provided that providers that have, you know, could be used for treating covid related patients. The, the grant money could or could be used to supplement lost revenue as a result of the, the COVID 19 crisis result of this. That cleared up a lot of questions for our clients. I don't have a single client that returned the money. They've been able to use it for those legitimate expenses. And then if you did do the, there was a remaining 20 billion that was started to be dis, you know, distributed in April of April 24th. And a lot of providers are getting that money and that that money, um, was more directed towards providers that were actually treated treating COVID 19 patients as opposed to just what their Medicare reimbursements were. A lot of children's hospitals and other providers that don't necessarily treat Medicare were sort of left holding the bag on the first round for the provider relief fund of 30 billion. So it, it seems like the 20 billion was targeted more towards providers on the front front lines for Covid-19. And then there's another 50 billion that's, that's being allocated for specific areas. A lot is going to hospitals. There's 250 million for the hospital preparedness program lot to purchase P P E, how to in specific covid 19 related areas. So, so yes, it's a a hundred billion dollar program in, in my estimation, it, it seems to not be perfect, but there is no perfect way to get money out to providers in a crisis and they did the best they could.

Speaker 1:

So you mentioned a little bit about which providers are eligible for grants. Do you wanna expand on that a little bit? Um, as, cause I know that that's a big question for a lot of folks is who's eligible for these grant monies?

Speaker 3:

So to be eligible for the general distribution pay payment, you must have billed Medicare on a free fee for service basis, part A or part B in encounter year 2019. So under the terms and conditions they have to provide or provide after January 31st, 2020 diagnosis, testing or care of individuals with possible or actual cases of Covid 19. And this is, which was very confusing to people because, um, a lot of providers weren't treating people for Covid 19, and it really caused a lot of providers almost to give the money back. But HHS came out and clarified that and they now broadly view every patient as a possible case of covid-19. So really the test is, were you a provider in of Medicare fee for service basis in part A or part B in calendar year 2019?

Speaker 1:

So, uh, we're talking now about the next 20 billion that might be available for grants. Um, how will that amount be determined for individual providers?

Speaker 3:

So the, the HSS just issued clarification on this, and, um, it, it's designed to, it's designed to, to relieve, uh, providers who bill Medicare fee for service with at least 2% of the patient's net patient revenue, regardless of that provider's payer mix. So the payments are determined based on a lesser of 2% of the provider's 2018 net patient revenue or the sum of incurred losses for March and April. If the initial general distribution payment you received between April 10th and April 17th was determined to ab at least 2% of your annual patient revenue. So if you already receive more than that, you're not gonna receive anything else in the general distribution payments. So this is, this is, again, tailored more towards providers that are actually treating COVID 19 patients on the frontline.

Speaker 1:

So can you talk a little bit about the payroll protection program and how that might apply to providers as well?

Speaker 3:

Sure. So this is, this is the most powerful tool of the CARES Act. And the, the reason is it's, it's ostensibly for, for the most part, free money and the loans are converted to a grant. And there, there was initially 350 billion allocated to the program, and it went almost immediately. They did CARES Act two in, uh, later on in April, and there's 250 billion of that that was allocated. There's still about a hundred billion the last I checked available. And banks are kind saying that they now don't have enough applications for it. So really the, the, the loan is set at two and a half times your monthly payroll, and then once you receive the loan, there's a forgiveness calculation, which the money is forgiven and, and you never have to pay it back so it converts to a grant. So this is a very powerful tool. Um, most providers are aware of it, a lot of them are, are not eligible. Um, but some are, and some have not realized, especially smaller providers haven't realized that they're eligible, especially critical access hospitals.

Speaker 1:

So can you expand a little bit on the, um, the providers that would be eligible for the payroll protection loans? Um, I know there's been a lot of discussion about critical access hospitals potentially being, uh, being eligible, but it would be helpful, I think for folks to know what the criteria are.

Speaker 3:

So it's for-profit non-for-profit providers are eligible, and the the tests, there's, you get two bites of the apple. If you're under 500 employees, you are eligible. Now, there is a second bite at the apple for a, what they call, and this gets very complicated, but the, the sba, it's called a NAS code, and it determines your eligibility for SBA loans. And the P P P is eligible. You're eligible through the, the SBA program. You make the application through your SBA lender, and if your revenue, so if you're less than 500 hundred employees, if your revenue is under 41.5 million and you are an acute care provider such as a, a hospital you will be in, that also includes chemical dependency hospitals, mental health hospitals, which certainly could potentially be under 41.5 million. You are eligible, the test for a skilled nursing facility is 30 million. And, um, also, I know Andrea, you had asked about public hospitals. So public hospitals with will be eligible if they're tax exempt under 5 0 1[inaudible] and receive less than 50% of their funding from public funds. And that doesn't include payments from, from Medicaid. So a lot of public hospitals that just get a small tax, uh, tax payments through the, the local fundraising or, or a local tax should potentially be eligible for the P P P as well. Lots and lo I would say most critical access hospitals are eligible. Uh, a lot of standalone nursing homes or two or three location nursing homes are eligible.

Speaker 1:

So one of the aspects of the payroll protection program is forgiveness. Uh, can you talk a little bit about how forgiveness is calculated and how you qualify for that forgiveness?

Speaker 3:

Sure. So the, once you receive the loan, the loan funds, it's in your account, that starts an eight week window and that eight week window, well, first off, 75% of the loan proceeds have to be used for payroll purposes such as your payroll, your, uh, you know, benefits, healthcare benefits 401K match, um, that has to be used for pay payroll purpose. So 75% of the loan, the other 25% of the loan can be used for rent, utilities or interest payments on mortgage, not your mortgage payment, just just the interest. And what the, what the bank will do is you have to submit an application for forgiveness after the end of the eight week period. And if your number of full-time equivalence, the FTEs in that eight week period after you receive the loan, is more than the, than how many full-time equivalents you had between February 15th, 2019 and June 30th, 2019, a hundred percent or the, that, that loan amount will be forgiven, hundred per a hundred percent of the loan amount will be for forgiven, provided that you haven't reduced salaries by more than 25%. So the government is really incentivizing companies instead of laying off employees and having them go on unemployment, they're incentivizing employees or employers to keep employees on your payroll and you will get a full forgiveness of, of the loan amount. And there is a, for, for providers that have been stung by this drop in elective surgeries, and as I said, it's sort of a, a trickle coming back as opposed to a, a flood of patients coming in for, for elective procedures, there is something that you should be aware of that by June 30th, if you have hired back all of the employees and you have restored their salaries, um, to full salaries, and this is, these are just employees of under a hundred thousand dollars that they care about. Once you do that, um, there's, there's basically a forgiveness procedure that if you do it by June 30th, the full amount will be forgiven. So it'll be treated as if you had these employees on your payroll the full eight weeks. And there is something that, and this is just for employees, so independent contractors, and I know a lot of providers have independent contractors, physicians, and the what, what a lot of what I've noticed a lot of providers not understand is that the PPP loans, you can't use the independent contractor physicians when you're calculating, calculating your loans. What you can do is have those individual physicians make an application on their own and they can get up to potentially$16,500 of what should amount to be if everything goes correctly free money. So providers should be getting that information to their, to their independent contractor physicians. We can't apply for a P P P on your behalf, but you can apply on your behalf. So I think that's important distinction that I've seen a a lot of clients mis make a mistake on.

Speaker 1:

So I think that's gonna be really helpful information for a lot of providers. Um, shifting gears a little bit, um, can you talk a little bit about what the E I E L is?

Speaker 3:

So the E I D L is, is Emergency disaster loan. And instead of making an application through your lender, you make it straight, straight on the, the SBA website. And it was supposed to be for up to 2 million and for areas that were hit hard by COVID 19, which is all areas of the country, and the, the loan amounts, there was such high volumes. Instead of going to 2 million, 2 million, they've basically chopped all the loans down to$150,000. But the CARES Act did make a, a, um, special, a special dispensation in there that you just, by applying for the grant, you get up to$10,000, which is meaningful money for a lot of small providers, and it's calculated by a thousand dollars per employee. So if you have$10,000 or 10 10 employees, you would get a grant of$10,000 and this is a grant, you don't have to pay it back. Um, it, it will impact, if you get a P P P loan, it will reduce the amount of your loan forgiveness by$10,000. But still, it's, it's worth making the application. And, and the only stipulation is that, that the E I D L, if you have a P P P loan, you cannot use the E I D L for, for payroll purposes. You have to use it for, for another purpose, such as, you know, paying your billing provider, um, paying your, paying other expenses, working capital expenses, buying ppe, uh, buying, buying medical equipment. So really it, uh, there, there, it's, it's worth doing. The amount of the loans have been$150,000. It's at 3.75% interest. So it's a, a very low interest rate. And I, I forgot to mention on the PPP loan that anything that isn't forgiven is a two-year amortization. You don't have to make payments for six months, and the interest is only 1%. So, um, the, the, the interest rates for, for both loan is, is very low. The E I D L, the loan terms we're seeing are 30 years. So it's$150,000, 3.75% interest, and you don't have to pay it back for, uh, an exceptionally long period of time. You have to make monthly payments. So, uh, again, the E I D isn't, isn't as powerful as the P P P, but it's certainly worth doing.

Speaker 1:

So who's eligible for the E I D L?

Speaker 3:

So it's going to be the, the, the same test as the P P P, it's going to be 500 employees and the, and the HS code or, or excuse me, or the NAS code. So 41 and half million for hospitals, 30 million for skilled nursing providers. Um, some staffing, staffing firms are, you know, 20 million. So it, um, a lot of staffing firms have more than 500 employees, but have lower revenue. So I think that, um, and also for-profit and nonprofit providers are eligible for the E I dl.

Speaker 1:

So how about the Main Street lending program as another option for providers? Do you wanna talk a little bit about that?

Speaker 3:

Um, yes. So I know, I know Wayne Gretzky, he talks about he doesn't skate where the puck is, he skates where the puck is going to be. I think that the, the P P P loans, the E I D L, the HHS grants are, are slowly becoming what I would, what I would call, uh, old news. Those funds are being exhausted. So the Main Street lending program is now just about to come online, and this is a program through the Federal Reserve. You make the, you make your loan application through your local bank, and the Federal Reserve is going to buy that loan from your bank. But the, but the amounts, and this would be very useful for large providers because the, the amounts of the loans can be, can be up to 25 million for new loan credit facilities. There, there's a minimum loan amount of$500,000. Now, the, the one caveat for non not-for-profit providers is that they are currently not eligible for the main Street lending program, but everyone expects that to change. The, the Federal Reserve chair has, has said so that they need to be, they need to find a way to make non-profit providers eligible for the main Street lending program. I would expect to see a credibility facility set up for nonprofit providers very soon. But, um, you know, it's a, it's a large fund, it's 500 billion and the providers, if you're under 15,000 employees, you are, you are eligible and the interest rate's going to be very, very low. It's, it's li I b o r, the three month, the one month, the three month li i b r plus 300 basis points. So it's gonna be a floating interest rate, but the one month li I B o R right now, I think is 0.1%. So you're looking at a 3.1% loan and it's, it's going to be a fairly short immunization, but there's a one year deferral, so you don't have to, to make payments for one year. And God willing, the Covid 19 crisis a year from now should be, should be over, hopefully they have a vaccine, or hopefully we get herd immunity by that time and it will end. But the way we currently are forecasting this, people that are a lot smarter than I am, that are in the finance world, is that we're going to be continue into a liquidity crunch. Now, this isn't gonna be like 2008 or 2009, where the banks didn't have enough liquidity on their books to make loans to, to their customers. This is gonna be more like the, I would say the, the crisis of, um, for the customers where the healthcare providers aren't going to have enough cash. The electric procedures simply aren't going to be bouncing back to the levels that they were within the next few months. So I would strongly encourage providers to start once this application is open to make, to start, to start making an application for a Main Street loan. And that, um, the payments are 15% will be at the end of the second year, second year, 15% at the end of the third year. And it'll be a balloon payment at the end of the fourth year for 70%. But you can always refinance this loan if need be, and cash right now is going to be king and you're going to see a, a sinning of the herd and companies with, with, with capital and options on their balance sheet are going to be able to survive, make acquisitions and grow. As, as we know from the healthcare, the healthcare industry has been grow or die really the last seven years. And, and as you look to make acquisitions, this main Street lending program could help you with that.

Speaker 1:

So, so looking ahead to the future, what do you think that healthcare providers should be doing, um, in terms of long-term strategic planning in the wake of the pandemic?

Speaker 3:

So since, since since the Affordable Care Act was passed, we've seen a lot of consolidation in the healthcare industry and the, the a a lot of rural hospitals have, have, have, um, been acquired. A lot of rural hospitals have shut down. Uh, a lot of standalones skilled nursing facilities, assisted livings have, have been acquired or, or ort shutdown. Rural health models have have, you know, forced companies to really, as I just mentioned, kind of grow or die. Um, I've been involved in a lot of these, uh, you know, you hate to use the term distress mergers and acquisitions, but, um, and I've gotten to see what works and what doesn't in the distressed m and a market. And the, the biggest problem that, that most hospitals and nonprofits and big community care, continuous care retirement centers that CRCs have is they wait too long, they start drawing down their foundations and they end up being in crisis before they start talking affiliation with another, another provider. And once you start that process of looking for a partner, you start too late. And when you start too late, you don't have nearly as many options. So we've seen closures as a result because there have been no, no potential merger options. And then we see, we see, uh, providers with only one option. And once you only have one option, your leverage and negotiations drops dramatically. So board members and officers of their organization, they should be be thinking about how is this going to this COVID 19 crisis going to impact our, our long-term liability? You know, should we be talking about affiliating with another organization? Should we should be acquiring other organizations? I think that you really need to be, think thinking strategically because the dynamics of healthcare, um, are changing cause of covid 19. It's not going to get any easier in the, in the long run. And I, and I think we need to, you know, be advising our clients and looking at this, looking at this option and potentially engaging consultants to, to say, are we a viable organization or do we need to run a merger and affiliation or sale process? So if that's what I think that they should be doing.

Speaker 1:

So before I close, I'm gonna ask Ross if he has, um, an answer to that last question about what providers might be doing for long-term strategic planning after the pandemic. Anything that, uh, you think from your perspective, Ross, that they should be doing differently?

Speaker 2:

Um, overall, I mean, where, where I have seen some movement is in the area of, um, certain, certain companies or healthcare providers are going to be trying to kind of push the limit of the box to try to find, um, an ex an expansion of the term direct physical loss under their property policy to try to get recovery from that. Um, I'm not quite sure whether that's going to be entirely successful, but to be honest, um, once you've had your claim denied by an insurance carrier, it's probably not, uh, a bad idea to at least explore that option. Um, there are, there are a lot of carrier, there are a lot of, um, hospitals and healthcare providers out there that are, um, that are really in, uh, financial straits from this to, to, to, to start some litigation. If you wish to go that route. Might not be a bad idea.

Speaker 1:

Well, thank you Ross, and thank you Todd, for, for, for all the great information that you've provided. I think it's gonna be very helpful for providers as they go forward and fight on the Covid-19. Thank.