CARES Act Medicare loan repayment will cut reimbursement by 25%, industry execs say

Hospitals are using dramatic language in their effort to convince Congress to allow more time to repay loans meant to sustain them during the pandemic—arguing, for example, that 25% of hospitals’ total payments will vanish once repayment starts.

But for many, especially large, well-capitalized companies, the situation isn’t as dire as their trade groups would have lawmakers believe.

“For a lot of them it could just be, ‘OK, we can give this money back. We didn’t use it,'” said Rick Kes, RSM’s senior healthcare industry analyst.

Part of the deal for hospitals that got a chunk of the $100 billion in accelerated and advance Medicare payments was that CMS would start recouping the money after 120 days. Recoupment is coming in the form of garnishing 100% of hospitals’ fee-for-service Medicare claims going forward until the loans are repaid. Hospitals say that’s too harsh.

The trade group Federation of American Hospitals, which represents for-profit hospitals, wants CMS to capture just one-quarter of Medicare claims in its recoupment. Taking them in their entirety would cut off roughly one-quarter of hospitals’ total reimbursement, since that’s the average percentage of reimbursement coming from fee-for-service Medicare, according to FAH.

“It’s untenable,” said Chip Kahn, the Federation’s CEO. “Hospitals are going to provide the service to the Medicare beneficiary and be paid nothing for it. There has to be some adjustment.”

Others, like the American Hospital Association and the National Rural Health Association, want the loans forgiven entirely in some cases. The loans were provided under the Coronavirus Aid, Relief and Economic Security Act.

The reality, as with any finance issue, is that each hospital’s situation is different. Large, investor-owned companies like Tenet Healthcare are swimming in cash—$2.7 billion in excess cash, to be exact—while small, rural hospitals are indeed close to the edge. Most providers accepted the loans, but whether they used them or set them on the shelf depends on how strong they were before the pandemic struck.

RSM’s Kes, who works with not-for-profit systems, said he has many CFO clients who accepted the advance Medicare payments in late March or early April but didn’t end up using the money because their systems then received enough grants from the provider relief fund to get them through the crisis.

“In some respects, it’s still sitting in their cash account and they can repay Medicare when they start asking for those payments,” he said.

That said, Kes said many hospitals were financially distressed going into the pandemic and did spend the loan money. They may struggle to repay it in July or August.

How much difficulty a hospital has in repaying the money depends on its pre-COVID cash position and volume recovery in the second half of the year, said Suzie Desai, a senior director with S&P Global who covers not-for-profit hospitals.

“If you had like 300 days of cash and this brings you down to 280, it’s probably not a big deal,” she said. “But if you were sitting at something much lower, it really is month to month. For hospitals with weaker balance sheets and weaker operations already, it could be a challenge.”

The FAH is asking Congress for a number of tweaks, including extending the start of repayment from 120 days to 12 months. The group also wants hospitals’ pre-interest repayment period extended from 12 months to at least 36 months. And it wants the interest rate cut from near 10%—which Kahn called a “penalty interest rate”—to no more than 1%.

House Democrats included most of those terms in their opening bid for the fifth round of COVID-19 relief, although that bill is unlikely to pass as written.

Current business recovery projections for the hospital sector show that sticking with the original loan repayment timetable is unlikely to put much burden on the financial profiles of for-profit operators like Tenet, HCA Healthcare and Universal Health Services, Megan Neuburger, a managing director with Fitch Ratings, wrote in an email.

On the not-for-profit side, Fitch Senior Director Kevin Holloran said most health systems are “very liquid” with significant cushion to absorb the hit that’s taking place. He cautioned, though, that rating agencies like Fitch tend to only see the top performers.

Systems tended to lose 40% of their top-line revenue when they suspended elective procedures between mid-March and mid-April or May, Holloran said. The systems Fitch rates can generally absorb that level of hit for 45 to 60 days using measures like furloughs and pay cuts, he said.

“As electives get back to pre-COVID levels, they will start zero-ing Medicare billing, but the two should balance out for the most part,” he said in an email.

On an investor call earlier this week, executives with Dallas-based Tenet said the company had received nearly $700 million in stimulus grants, which don’t need to be repaid, boosting its excess cash to nearly $2.7 billion.

“We continue to believe we will not have significant cash burn in the second quarter,” Tenet’s Chief Financial Officer, Dan Cancelmi, said on the call.

Still, Cancelmi said Tenet is hopeful Congress will extend repayment terms on the $1.5 billion in advance Medicare payments the company received.

For companies like Tenet, it’s about keeping a buffer in place in case of a second wave of COVID-19, said Brian Tanquilut, a healthcare equities analyst with Jefferies.

“Repayment has to be done in the form of service,” he said. “The problem is, if there is a second wave, there’s a risk that you don’t have enough patients between now and the deadline to have enough billings to make up for what you made.”

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