What Happens When CMS Loans Come Due?
CMS’ Accelerated and Advance Payment (AAP) 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 the crisis to offer providers immediate cash infusions. Hospitals could receive six months of Medicare revenue as a loan, with Critical Access Hospitals eligible for even more. Repayment of these loans begins next month.
While the AAP was designed to stabilize hospitals in the short-term, COVID-19 is not a short-term disruption. The repayment of $100B in pandemic-related loans beginning in August could be a tipping point for hospitals in an already tenuous financial position.
For the average hospital with a sizable proportion of net revenue coming from Medicare, this could be disastrous, particularly as hospital utilization remains depressed and COVID cases spike in some regions. Not to be overlooked, AAP loans come with a steep 10.5% interest rate, further compounding the financial hit. Some hospitals were also able to receive loans through state Medicaid programs, which seem less likely to be forgiven by cash-strapped state governments.
Hospital associations are pushing for relief on AAP loans, recognizing the pressure repayment will place on facilities struggling with financial, clinical and operational disruption amid ongoing uncertainty. The Federation of American Hospitals summed up the challenges succinctly: “Despite the fact we are still very much in the COVID fight, starting on or about August 1st, hospitals around the country will lose Medicare fee-for-service payments. These payments will be zeroed out until the borrowed funds are repaid. The repayment schedule does not account for the continued strain on our nation’s hospitals, including that many patients are reluctant to come back for care.”
Many hospitals that received an AAP loan have held it in cash ready to repay. However, organizations that required AAP loans to maintain operations need a strategy in place as the Medicare reimbursement spigot turns off. This is most critical for hospitals that faced low margins and liquidity challenges pre-COVID. In the coming months, they will see a drastic reduction in Medicare revenue as their AAP loans are repaid, while they simultaneously struggle with depressed elective and ED volumes. Looking ahead, outstanding AAP debt could exacerbate the predicted spate of hospital bankruptcies through the end of 2020 and into 2021.
Prudent hospital leaders are examining their organization’s ability to repay AAP loans. No doubt some repayment strategies will be sweeping and may include a sale/lease-back of property or the sale of ancillary businesses like home health, skilled nursing or ASCs. Impacted hospitals are also exploring partnerships that can help them meet both financial and clinical objectives. With the help of a larger partner, some hospitals may find themselves not only better positioned to repay their AAP loans but to best serve their communities through this prolonged pandemic. Hospital leaders should be immediately examining their organization’s ability to repay AAP loans and what opportunities they may want to explore as they forge a sustainable post-COVID path.