In response to the unprecedented strain COVID-19 placed on healthcare organizations (providers), the federal government created the Provider Relief Fund (PRF) through multiple pieces of legislation, providing much-needed financial assistance. Congress appropriated $175 billion to this fund, which is administered by the Department of Health and Human Services (HHS), and to date, over $100 billion has been obligated or disbursed through several distributions.
While this money has provided sorely needed liquidity, the constantly evolving, ambiguous guidance around the many conditions attached to both the distributions and use of funds have created a complex web of concerns for recipients. These concerns are particularly pressing as the PRF distributions will be subject to significant oversight and scrutiny. As providers contemplate how they intend to deploy these funds, they must consider how to reduce risk and maximize benefit, while contemporaneously maintaining appropriate controls and documentation to meet reporting and audit requirements.
Applying PRF To Healthcare Expenses
Providers must consider the distinction between their eligibility to receive the funds and the eligible uses of the funds. Providers that receive this funding must attest to eligibility terms and conditions, certifying that they are indeed eligible for each of the distributions they receive.
Presuming providers are eligible for the funding they received, they must then consider how to deploy the funds in accordance with the terms and conditions. Per the Department of Health and Human Services, these funds may only be used to “prevent, prepare for, and respond to coronavirus” and “shall reimburse the recipient only for healthcare related expenses or lost revenues that are attributable to coronavirus.” Here, it is critical for providers to understand the unique nuances of these two categories of uses — healthcare related expenses and lost revenues as well as the continuum of risk that comes with each category.
The lowest risk uses of Provider Relief Fund monies are those healthcare related expenses that clearly and directly tie to COVID-19 response, such as personal protective equipment, additional cleaning services, and unexpected incremental staffing. The language in Health and Human Services’ guidance, however, indicates that the funds may be used for supplies and equipment “used to provide healthcare services for possible or actual COVID-19 patients.” Because the HHS defines any patient as a “possible” COVID-19 patient, there may be an opportunity to use these funds more broadly, though uses under these circumstances may carry a higher risk. In particular, it remains unclear whether a provider may allocate the full cost of these more routine expenses to the PRF, or whether it may only use PRF monies to cover increased expenses where those increases are attributable to coronavirus (e.g., increases in unit costs due to surge pricing or increases in the amount purchased).
Using PRF to Reimburse for Lost Revenue
Although the healthcare related expenses category of eligible uses is, largely, more straightforward than lost revenues, many providers may not have enough eligible expenses within the eligible period to deploy all of their PRF funding, leading to the need to consider the “lost revenue” category. While PRF funds can be used to reimburse for revenues lost due to coronavirus, the money may only be used to “prevent, prepare for and respond to coronavirus.” Simply put, just because a provider can substantiate a revenue loss, it cannot spend the money on whatever it chooses.
Providers must first estimate revenue losses due to coronavirus. HHS has stated providers may use “any reasonable method” to make this estimation but has recommended two specific methods: comparing current year to the prior year or comparing the current year to budget. Based on this calculation, per HHS guidance, providers may use their PRF distributions to “cover any cost that the lost revenue otherwise would have covered, so long as that cost prevents, prepares for or responds to coronavirus.” HHS has provided examples of eligible costs, including rent, employee payroll and equipment leases. Because HHS is encouraging providers to use PRF monies to respond to the COVID-19 crisis by “maintaining healthcare delivery capacity,” using these funds to cover costs when expenses exceed revenue seems to be low risk, particularly if used for costs explicitly outlined by HHS.
HHS has not clarified the issue of providers whose revenue, while diminished, still exceeds expenses. For providers with a largely variable expense base, expenses were likely reduced to account for decreased volume. In this circumstance, it is unclear whether HHS would still permit providers to use the PRF money to cover costs lost revenue otherwise would have covered, because in this scenario, the PRF money would be replacing lost profitability, rather than lost revenue.
Deploying funds to cover lost revenues under this scenario, in which a provider has lost revenue but is still able to cover expenses, seems to be one of the most complex and riskiest uses of PRF monies. This issue is particularly problematic for physician practices in which partners receive dividends, rather than salaries. For these practices, it seems reasonable that physicians need to continue to receive fair market compensation as a measure to maintain delivery capacity. Individual practices must consider their risk tolerance for using this money to replace profitability to drive compensation to partners. As a note, these relief funds cannot directly be used to make compensation payments in excess of $197,300.
Preparing for Reporting and Oversight
Finally, as providers navigate the complexities of eligibility and eligible uses of PRF monies, they must simultaneously stand up appropriate internal controls and documentation to prepare for future HHS reporting and audit requirements. First, providers should document and implement effective internal controls to demonstrate responsible stewardship and transparency in the management of their distributions. Additionally, providers should maintain careful documentation of their eligibility for the funds they received, the contents of which will depend on the distributions received, but will likely involve pieces such as bank statements identifying PRF funds received, tax returns and proof of patient care on or after Jan. 31, 2020. Part of this eligibility documentation should include the provider’s lost revenue calculation.
As providers begin deploying the funds, detailed documentation of uses as well as their justification should be carefully compiled. Providers should expect to be required to provide their justification for each expenditure, detailing how it helped to prevent, prepare for, or respond to coronavirus and whether it is attributed to the healthcare related expenses or lost revenue category. Documentation will likely include general ledger, individual receipts, line-item budgets, and internal financial statements.
Kate Broderick is a manager with Citrin Cooperman.