CARES Act Provider Relief Fund: Compliance and the Impact on Hospital Margins  

Joseph Ho

Associate Editor

Loyola University Chicago School of Law, JD 2022

The effects of COVID-19 create numerous hospital financial management issues. One specific issue is hospitals maintaining financial stability. As the United States adjusts to the pandemic, hospitals have the burden of navigating their purpose, mission, and values while maintaining operations. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is a comprehensive bill that includes provisions that financially assist healthcare providers. Nevertheless, as with all federal assistance, compliance with specific conditions is required. As the pandemic continues, if hospitals accept federal help to stabilize finances, awareness, and increasing training to comply with federal guidelines is crucial.

Hospital margins amid COVID-19

While certain U.S. hospitals carried negative margins before COVID-19, the American Hospital Association projected median hospital margins were ‘three and a half percent’ before the pandemic. Additionally, prior to COVID-19, hospitals were already facing financial issues, with certain indicators leading the Congressional Budget Office to project that about half of hospitals might face negative margins by 2025.

However, the start of the pandemic caused an influx of financial challenges in the industry. Indeed, Richard Bajner of Navigant, a Guidehouse Company, stated that conversations with hospital executives concentrated around “the deteriorating financial situation.” Indeed, the pandemic has caused significant problems with volume, revenue, and increasingly elevated expenses.

This has resulted in a sharp margin drop for not-for-profit hospitals, while other key financial indicators declined for the four largest publicly traded for-profit hospital systems in the early months of COVID. In addition, other indicators also highlight these problems as “hospital’s median operating EBITDA Margins fell in March,” “occupancy rates dropped,” and “bad debt” rose.  Finally, it is worth noting that median margins — without CARES Act funding — were are expected to drop negative fifteen percent.

As Rick Pollack, American Hospital Association (“AHA”) president and CEO, stated in July 2020: “As today’s analysis shows, this pandemic is the greatest financial threat in history for hospitals and health systems and is a serious obstacle to keeping the doors open for many.”

HHS Provider Relief Fund

Through the CARES Act, the Paycheck Protection Program, and the Healthcare Enhancement Act, the Department of Health and Human Services (“HHS”) allocated $175 billion to hospitals and other healthcare providers. This funding will go a long way for hospitals and other providers such as dental services, emergency services, or other services in the medical setting. Indeed, the funding should provide much-needed support to stabilize the financial impact hospitals incurred due to COVID-19.

The CARES Act Provider Relief fund is distributed in phases. For phase one general distribution, $30 billion was first distributed, with $20 billion subsequently distributed among Medicare Fee-For-Service (“MFFS”) providers based on certain criteria. In addition to these allocations, HHS distributed to other high-priority providers. These providers include hospitals in high impact COVID-19 locations, providers in rural areas, safety-net hospitals, skilled nursing facilities, Indian Health Services, and Nursing Home Infection Control Distribution. Additionally, HHS has made approximately 18 billion dollars available from phase two general distribution. Although this funding will go a long way to providing relief, compliance is a concern when adhering to the terms and conditions set out by HHS. 

Compliance with the Terms and Conditions

First, to accept the funds, providers must accept or reject funds within 90 days. Silence within the 90 days will be considered acceptance and agreement to the payment terms and conditions. To reject payment will require returning the funds to HHS within 15 calendar days. Nonetheless, accepting the funds requires complying with Terms and Conditions and forces providers to be diligent with the fund’s uses. Additionally, it would benefit providers to internally audit, monitor, or other integrate other compliance measures.

Specifically, Terms and Conditions vary depending on the type of distribution. For example, phase one general distribution — which included a first tranche distribution of 30 billion dollars — contains requirements such as “a certification to not charge out-of-network patients more for COVID-related care than it would charge if they were in-network,” requirements to follow certain statutory provisions, as well as other compliance obligations. In contrast, the terms and conditions for tranche two, under phase one general distribution, included $20 billion, which generally incorporated similar requirements from tranche one. However, it also requires providers to “submit revenue from 2018 when applying or within 90 days of collecting payment (when attesting).” It is worth noting, the Targeted Allocations, which include High-Impact Distribution, Rural Distribution, Skilled Nursing Facilities Distribution, and other distributions that fall under Targeted Allocation, also require compliance with certain Terms and Conditions.

The takeaway for healthcare providers

The overwhelming effects of the pandemic create enormous financial management issues for hospitals. As hospital margins decrease, hospitals and other providers search for ways to stabilize. While layoffs, furloughs, and other cost-cutting methods are constant and expected in all sectors, federal assistance is vital to maintain margins. However, compliance with the terms of that assistance is complex. Because of the complexity and nuance of the requirements, general counsel, chief compliance officers, and other stakeholders should be aware of and prepare for HHS’ terms and conditions.