Medicare Advance Payments Complicating Hospice M&A

The federal government has provided aid and support to hospice providers and other health care organizations to help mitigate the financial damage brought on by the COVID-19 pandemic. However, some providers have struggled to navigate the complexities of these programs and the associated rules, including the Accelerated and Advance Payment Program

AAP Programs are typically used to give health care organizations emergency funding and address cash flow issues for providers and suppliers when there is disruption in claims submission or claims processing, including during a public health emergency or federally-declared disaster.

Qualified entities must have billed Medicare for claims within 180 days immediately prior to the date of signature on the provider’s or supplier’s request form. The organization must not be in bankruptcy, not be under active medical review or program integrity investigation, and must not have any outstanding delinquent Medicare overpayments.

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Recipients typically have to pay back these funds within one year or less. For many hospices, that bill will become due early in 2021.

Hospice News sat down with Chris Donovan, partner at the law firm of Foley & Lardner, to discuss the AAP program, providers’ repayment options and its impact on providers’ business operations. Foley & Lardner is one of the 50 largest law firms in the nation. Donovan is a transactional attorney who represents hospices and other post-acute providers during mergers and acquisitions. He represents some of the largest hospice companies in the nation.  

How does the Medicare Accelerated and Advanced Payment program work?

Basically it’s in the form of a loan, even though it doesn’t have the word “loan” in its name. The program, which was announced by [the U.S. Centers for Medicare & Medicaid Services (CMS)] earlier this year, allows CMS to make advance payments to providers. This would apply to basically all Part A and Part B providers, including hospices.

If a provider is providing services and submitted remittances for those services, CMS would accelerate the payment of those invoices to a point in time earlier than they would normally be paid, on an interest free basis. Then, looking at it like a loan, that money would be effectively recouped over time by CMS.

The problem the provider community had with the program is the repayment or the recoupment.

The way it was going to work was, absent recent modifications, the money was going to be recouped in a lump sum, which would have put a lot of providers in a cash constraint. If the money wasn’t repaid and reconciled an interest payment would have to be made or an interest plan would have to be adopted. Recently, CMS came up with some new guidance.

Providers who were supposed to be making payments in August of this year were entitled to a one-year deferral of payment. After that one year, Medicare would automatically recoup 25% of the Medicare payments that were otherwise owed. And at the end of the next 11 month period, recoupment would increase to 50% for another six months, and so on until full payment was made. If there wasn’t full payment at the end of that period of time, the provider could enter into what they call an extended repayment schedule (ERS), which is a loan payment for three to five years, which would carry some interest payments.

One of the things that is kind of interesting is CMS has indicated that the Provider Relief Funds [established by the CARES Act] can be used to repay these Medicare loans under the AAP. This is relief and good news for hospice companies who are cash strapped, in terms of getting through some of the choppiness of the COVID crisis. This was pretty welcome relief for most in terms of solving the AAP repayments.

Were there ambiguities or aspects of the program that were commonly misunderstood among health care providers?

I would say yes. If you look at CMS portals for Frequently Asked Questions on this program, you’ll see dozens and dozens of questions about things from when should the money be repaid, whether a parent company can take the money and distribute it to a subsidiary, can one entity receive the money and transfer the money to an affiliate, and how they can use the funds.

It sounds simple to say that we’re going to do a loan program and you’re going to repay the money. But it’s going to take the form of advance payment of the money you otherwise would have received on a Medicare Part A or B. The details are tricky in a lot of these things. 

Regarding the Provider Relief Fund, you mentioned that they could use those funds to pay back the advance payments, are there similar strings attached to those funds or other risks involved in accepting that money?

You basically have to effectively attest that the money is being used for your expenses associated with COVID or foregone revenues associated with COVID, and those two phrases are loaded with different meanings. In my world, this includes the purchase and sale of hospice companies. Virtually every hospice company out there right now in one form or another has taken either [Payback Protection Program (PPP)] loans, provider relief funds, or AAP money.

One of the challenges that acquirers are having now is how to buy those companies in a way that they don’t inherit the potential liabilities associated with either the improper receipt of expenditure, or reporting of the use of those funds to the government. Any of those could potentially lead to false claims with respect to the use of those funds.

Just take a simple example with the PPP loan program. We’ve had a bunch of deals, where if you buy more than 50% of the assets or stock of a company, that triggers a change of control under the [Small Business Administration (SBA)] guidelines. Many hospice companies access the PPP program, very legitimately, but buyers have looked at it and said to the seller that they want you to simply pay the money back, like it’s debt.

Of course, sellers are saying: Wait a second, I may not have to pay it back at all, because it’s forgivable if I use it for COVID-related expenses and lost revenue. I’ll submit the forgiveness application, and we’ll all kind of just hope for the best and assume the government agrees that we used the money appropriately. Buyers are saying that we’re making a bunch of assumptions here, that the money was properly used, properly received, and so forth — and what if it isn’t?

That’s created issues with respect to M&A transactions that we as lawyers have had to navigate through, whether it’s escrowing money or getting indemnifications or coming up with solutions to share risk. But the bottom line is, all of these programs have been worthwhile in terms of keeping a lot of providers going through this crisis.

The M&A machine has continued, and there’s still consolidation going on in the hospice space. Companies that we work with, that are actively doing those deals, have had to do a lot of unwinding on a lot of these programs.

Are these issues really complicating the diligence process in M&A transactions?

Before the COVID crisis if you were representing a buyer of a hospice company, and if they had some form of liability, like third-party bank debt, that was easy enough. They’d buy the company and instead of paying $10 million (for example), they would pay off the loan and then the new proceeds would go to the seller.

With these other types of loan programs — the provider relief funds, the PPP loans, the advanced accelerated payments — their loan might be repayable like debt, but most sellers are going to say they don’t plan to repay it. So it has created due diligence issues because as a buyer you’re asking if they appropriately applied for it, are they entitled to the money, did they use it in accordance with the government regulations.

The buyer can’t really look behind any of that other than taking their word for it, and get warranty in a document and maybe an indemnification. But if it’s wrong, and I end up buying the equity and stock in the company or doing a merger, I could potentially be liable for the misuse of those funds.

It’s complicated due diligence and created a need for an alternative kind of risk allocation mechanisms in terms of sharing that risk and coming up with ways to minimize it that we hadn’t previously seen before these programs rolled out.

Where does that leave hospice providers and others in health care? What should they be doing right now?

Plan on repaying it. The good news is they’ve gotten more time. I would recommend hospice companies start using the next year, which they now have, to rebuild their reserves and try to rebuild their census to the extent it’s deteriorated. Obviously, continue watching expenses. This  may be why some companies end up being sold, because they don’t have the balance sheet to get through it. We’re seeing definitely some of that out there. You need to engage in appropriate financial planning and controls.