Healthcare Private Equity CARES Act Reporting Updates
During the past 18 months, for-profit and private equity-backed healthcare providers have been inundated with not only operational challenges due to the COVID-19 pandemic, but also financial-related challenges and issues with changing guidance on how to account for federal funds received. For-profit entities were given the opportunity to receive federal dollars through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed in March 2020 as a response to the pandemic. These federal dollars have created additional questions and are anticipated to bring additional scrutiny from governing bodies. For private equity-backed organizations that are focused on growth, both organically and through acquisitions, the changing rules and regulations have been challenging, but with the additional guidance released on these funding sources in the last two months, there is some good news. Below is an outline of funding sources and issues facing for-profit healthcare organizations, the status of where each program stands today, and how for-profit healthcare organizations can prepare as reporting and repayment begins.
- Provider Relief Fund
- Paycheck Protection Program
- Medicare Accelerated Payments
- Social Security Tax Deferral
- Employee Retention Tax Credit
Where We Are Today
Provider Relief Fund (PRF)
On June 11, 2021, the U.S. Department of Health & Human Services (HHS) released an updated Post-Payment Notice of Reporting Requirements and subsequently updated the FAQ document in July 2021. This update was significant, especially surrounding the calculation for lost revenues. The lost revenue calculation will now only consider quarters that demonstrated lost revenue and not be offset by quarters that showed a gain over the baseline period. Another significant clarification was that the “Other Assistance Received” reported won’t be used in the calculation of expenses or lost revenues. Reporting entities are expected to determine their expenses applied to PRF payments after considering Other Assistance Received. The most common scenario is if a reporting entity received a Paycheck Protection Program (PPP) loan, it would not be able to double dip salaries and use those amounts for both PPP and PRF.
Some of the initial risks and intricacies related to PRF for for-profit entities would include, but are not limited to:
- Updated reporting deadlines and responsibilities for new add-ons and rollups – There are no extensions being granted to use or report on the funds. See the reporting deadlines below based on when the reporting entity received the money:
- General understanding of organizational structure and definition of reporting entity – Per the June 11 Post-Payment Notice of Reporting Requirements, a reporting entity is loosely defined as entities at the tax identification number (TIN) level. For-profit healthcare entities can be structured in a complex manner when it comes to having multiple TINs, so it’s important to understand at what level the reporting will happen. Initial questions on the HHS portal will drive the level in which the funds are reported.
- Ability to get reliable data at the reporting entity level for the right time frames – Baseline periods span all the way back to the first quarter of 2019, so it’s imperative that organizations understand at what level they’re reporting on these funds and that for any acquisitions or other changes in structure, legacy information is available.
Note: If the reporting entity itself was acquired or divested, it should self-report the change in ownership to the Health Resources & Services Administration by contacting the Provider Support Line at 866.569.3522; for TTY, dial 711. Hours of operation are 7 a.m. to 10 p.m. Central Time, Monday through Friday.
For more information and links to guidance and resources, see the BKD Thoughtware® article “The Rundown on the July Provider Relief Fund Reporting Portal and FAQ.”
Paycheck Protection Program
The PPP ended on May 31, 2021. Organizations are starting to see loans forgiven at this time, depending on the financial institution. In a July 9 notice, the U.S. Small Business Administration (SBA) informed lenders it is eliminating the loan necessity review for loans $2 million or greater. It will no longer request the Loan Necessity Questionnaire: SBA Form 3509 for for-profit borrowers. In addition, Loan Necessity Questionnaires previously requested by the SBA are no longer required to be submitted. As with most federal programs, document retention of loan forgiveness and/or repayment support is imperative and a risk of this program for for-profit entities with frequent change in ownership. As noted on the Loan Forgiveness Application Form, the borrower must retain PPP documentation in its files for six years after the date the loan is forgiven or repaid in full.
On July 28, 2021, the SBA released an additional interim ruling detailing two additional methods for borrowers with PPP loans under $150,000 to apply for forgiveness of the loan and a provision that would continue deferral of payments while a PPP loan forgiveness decision is under appeal by the borrower effective immediately. For more information on this update, see the Thoughtware article “PPP Update – New Forgiveness Options & Appeals Deferment.”
Medicare Accelerated Payments
On March 28, 2020, CMS expanded the existing COVID-19 Accelerated and Advance Payments (CAAP) Program to a broader group of Medicare Part A providers and Part B suppliers. Under the Continuing Appropriations Act, 2021 and Other Extensions Act, repayment begins one year from the issuance date of each provider or supplier’s accelerated or advance payment. After that first year, Medicare will automatically recoup 25 percent of all Medicare remittances otherwise owed to the provider or supplier for 11 months. At the end of the 11-month period, such recoupment will increase to 50 percent for each remittance for another six months. If the provider or supplier is unable to repay the total amount of the accelerated or advance payment during this time period (a total of 29 months), CMS will issue demand letters requiring repayment of any outstanding balance, subject to an interest rate of 4 percent.
As repayments occur, private equity owners and portfolio company management will want to ensure that recoupments are in line with repayment terms, repayment amounts on each remittance advice are tracked, and posting of cash in the billing system to specific accounts is appropriate so as not to create a cash posting issue on either the bank reconciliation or on individual accounts.
Social Security Tax Deferral
The CARES Act allowed employers to defer the deposit and payment of the employer’s share of Social Security taxes. The payroll tax deferral period began on March 27, 2020, and ended December 31, 2020. Half of the deferred amount is due on December 31, 2021, and the other half is due on December 31, 2022. For the most recent set of FAQs released by the IRS regarding this program, see Thoughtware article “IRS Releases Updated FAQS for Deferral of 2020 Employment Tax Deposits & Payments.”
Employee Retention Tax Credit (ERTC)
The ERTC was enacted in Section 2301 of the CARES Act to provide a monetary incentive in the form of payroll tax credits for employers to maintain their employees. There have not been significant changes to this program since March 2021, when the American Rescue Plan Act of 2021 was passed that extends the credit through the end of 2021. However, the bipartisan infrastructure bill currently awaiting a vote in the House contains a provision that would end the ERTC for most employers as of September 30, 2021. The U.S. Department of the Treasury and the IRS have released various guidance on the ERTC (see IRS Notice 2021-20, Notice 2021-23, Notice 2021-49, and Revenue Procedure 2021-33). For more details on the updated IRS guidance, view Thoughtware article “IRS & Treasury Release Guidance on Employee Retention Credit.”
How You Can Prepare Now
With the various new funding programs in place due to the pandemic, what can you as a private equity owner or a portfolio company management team be doing to help mitigate risk as reporting and repayment begin?
- Completeness of Funding Sources Received – Ensure that across the organization you understand which funding sources portfolio companies have received or which funding sources targets that have been acquired or are anticipating acquisition have received, and the reporting guidelines and repayment terms for these various sources. There are penalties and interest associated with missing deadlines of reporting, so it’s imperative there is a full inventory.
- Aggregation of Data – Start aggregating data now and getting familiar with the various government websites and forms that will need to be completed. Identify a responsible person in the organization and make sure to memorialize documentation of approvals and reporting submissions. Aggregating data for these funding sources can be extremely time consuming, so start identifying any issues that you may have with any changes in ownership or other transactional-related details.
- Identifying the Reporting Entity – In instances where your organization or investment consists of multiple legal entities under different TINs or Medicare licenses, ensure the entity has a plan for which level reporting will be submitted on and begin aggregating data accordingly.
- Responsibility of Reporting – If your organization has entered into an acquisition subsequent to the creation and funding of these programs, identify who is responsible for reporting and monitoring each program and that data is available to such party to do so adequately.
- Prepare for PRF Audits – For-profit and private equity-backed organizations will be required to undergo one of two options: Option for a 1) financial-related audit of HHS award(s) in accordance with Generally Accepted Government Auditing Standards or 2) Single Audit. This will most likely be the first time for-profit and private equity-backed organizations go through an audit of this nature, and there are many unknowns. HHS updated FAQ on June 11, 2021, to clarify the audit requirement is for expenditures, not receipt of funds, and is currently working on final requirements.
- Consider Impacts on Valuation – As you approach new targets for either new platforms or add-ons to current platforms, consider the cash flow timing and valuation impacts for any targets at risk of repayment and reporting on PPP loans or PRF.
If any questions arise as your organization begins to prepare information and gather data for reporting and repayment, contact your BKD Trusted Advisor™ or use the Contact Us form below.