Update on HHS COVID-19 Provider Relief Fund Considerations for Physician Practices
This alert covers recent developments within the U.S. Department of Health & Human Services (HHS) COVID-19 Provider Relief Fund (PRF), including clarifications to reporting and potential repayment requirements as well as an additional funding opportunity (phase 3 general distribution). After examining these developments, we provide considerations to prepare for potential financial and income tax issues created by PRF funding from the common physician practice standpoint of a for-profit practice (FP practice).
Updated PRF Reporting & Potential Repayment Guidance
On September 19, 2020—and subsequently updated on October 22, 2020—a Post-Payment Notice of Reporting Requirements (Notice) was issued by the U.S. Health Resources & Services Administration (HRSA), which clarified reporting requirements for the PRF funds attributable to the general and targeted distributions. Per the Notice, reporting will be required by February 14, 2021 (for all entities receiving more than $10,000 in PRF funds), of specified information supporting qualified use of the funds through December 31, 2020, for COVID-19 response-related purposes.
At a high level, information required to document qualified use is identified through a two-step process:
- Step 1: Healthcare-related expenses attributable to COVID-19 response
- Step 2: “Lost Revenue,” defined essentially as the change in patient care revenue from calendar-year (CY) 2019 to CY 2020, less expenses claimed in step 1 as well as COVID-19 relief funding sources other than PRF funds
If use of PRF funding is not fully supported by CY 2020 to 2019 analysis, entities also may compare the period from January 1 to June 30, 2021, to the same period in 2019 to further support use. Reporting for this time frame will be required by July 31, 2021.
The Notice states that “HRSA plans to offer Question & Answer Sessions via webinar in advance of the reporting deadline, and as needed, HRSA will also issue Frequently Asked Questions to aid in the reporting process.” FP practices should monitor this additional guidance to clarify the following key issues:
- Provider Compensation as Step 1 Expense – Expenses qualifying under step 1 “may be incurred both in treating confirmed or suspected cases of coronavirus, preparing for possible or actual coronavirus cases, maintaining healthcare delivery capacity, etc.” No further guidance is given to date on how this may apply to expenses of practices, such as compensation paid to providers. Qualification of expenses under step 1 could become important for FP practices to support PRF fund use if Lost Revenue is minimal.
- Compensation Cap Effect – The Notice states, “The Terms and Conditions associated with each PRF payment do not permit recipients to use PRF money to pay any salary at a rate in excess of Executive Level II which is currently set at $197,300.” How this restriction may apply to the calculation of Lost Revenue or the determination of healthcare-related expenses is not addressed beyond noting that “an organization receiving PRF may pay an individual’s salary amount in excess of the salary cap with non-federal funds.”
These issues may not receive clarification prior to the phase 3 distribution application deadline (noted below) or the typical tax year-end for FP practices (December 31, 2020). Please contact a BKD advisor for a consultation of the risks and financial implications of taking positions on these matters. Based on the law and guidance issued to date, there are significant variances in outcomes related to taking a reporting position(s) to each of the above items as well as other related considerations (such as other COVID-19 relief grants, loans, and disaster relief).
PRF General Distribution Phase 3
On October 1, 2020, HHS announced applications would be taken from October 5 to November 6, 2020, for funding under general distribution phase 3 of the PRF. These distributions are aimed at three separate types of healthcare entities:
- Behavioral health providers
- New healthcare entities in 2020
- All entities that received funding in general distribution phases 1 and 2 of the PRF. This distribution provides additional PRF funding to providers who had a decline in patient care-related revenue less expenses between the first two quarters of 2020 in comparison to 2019 in excess of amounts received through the earlier distributions. As of the date of this writing it's unclear whether the parameters for this distribution will be changed to patient-care related revenue only, similar to the Report Guidance Methodology change instituted on October 22, 2020, describes in the Lost Revenue calculations above. We will monitor the situation and provide updates as applicable. The amount of this distribution will depend on how much of the total $20 billion general distribution phase 3 pool is distributed to the first two types of entities, as well as how many other requests are received in this category.
While the application information requested is similar to earlier general distributions, application for the third category above requires provision of 2020 and 2019 quarterly financial information for patient care-related revenue and expenses supported by internal financial statements (required to be uploaded).
FP practice entities previously receiving PRF distributions should analyze whether PRF funding received to date has covered qualified uses as described in the above section and, if not, consider applying for this additional funding.
Additional Considerations for Physician Practices
FP practices should consider the following additional issues regarding PRF funding:
- Given that many FP practices are cash basis for income tax purposes, attention should be given to estimating potential repayment requirements for portions of PRF funding received and consideration of refunding prior to December 31, 2020, to avoid potential 2020 taxation on these excess amounts.
- Given the definition of Lost Revenue involving CY 2020 operating results, FP practices should consider the ramifications of the definitions of qualified use of PRF funds within year-end tax planning processes, e.g., soft close, such as the timing and amounts of compensation paid. Timely planning ahead of year-end could allow additional time for practices to determine changes to typical processes if needed, e.g., bonus methodologies or timing.
If you have questions regarding the PRF program, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.