Fitch issues warning about looming start of hospital repayments to Medicare

• Hospitals in August must begin to repay more than $100 billion in Medicare loans.
• The repayments could be complicated by renewed bans on elective surgeries amid some resurgence of the coronavirus.
• Hospitals are urging Congress to at least ease the loan repayments.

In August, hospitals will need to begin to repay more than $100 billion in Medicare advance payments, and that could prove a heavier lift than anticipated, according to a rating agency.

Fitch Ratings issued a July 8 assessment in which it warned that rising coronavirus infections — and related shutdowns of elective care — and patient hesitancy to seek hospital care could adversely affect hospitals’ ability to repay the loans authorized by the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Fitch had expected no significant burden on the for-profit hospitals that it rates, given their liquidity and the financial recovery projections for hospitals.

“However, repayment could be a greater challenge if the recovery is slower than anticipated due to a continued rise in infections or patients remaining hesitant about seeking non-coronavirus medical care, and Congress does not amend repayment terms,” according to the Fitch statement.

The rating agency noted that in recent months, depressed volumes have weighed on the revenue and operating margins of healthcare providers as elective procedures were canceled to increase capacity for patients infected with the coronavirus and in response to government orders.

Hospitals and health systems currently report average declines of 19.5% in inpatient volume and 34.5% in outpatient volume relative to baseline levels, according to a recent report by the American Hospital Association (AHA). Hospitals had been projected to lose $202.6 billion between March and June, AHA previously estimated.

Such volume declines and the associated revenue losses may continue since states have begun to issue orders for hospitals to again cut off elective procedures as virus infections surge in some areas. For instance, Texas Gov. Gregg Abbott recently ordered hospitals in several counties to cease elective procedures. In all, 40 states had at least partial bans as of June 26, according to a national tracker by McGuire Woods.

Repayments of Medicare advances could weigh on hospitals

The CARES Act expanded the Medicare Accelerated and Advance Payment (AAP) Programs administered by CMS to provide up to six months of Medicare payments as temporary emergency loans to stabilize operator cash flow. Hospitals have 12 months to repay the advances through withheld Medicare payments for new services delivered. Any remaining balance would become a loan with a nearly 10% interest rate.

“We believe the loans’ short maturity date was arbitrarily set by regulators, given the uncertain duration of the pandemic, the recent uptick in infections and hospitalizations, and the potential for a second wave of infections nationally versus intermittent hot spots,” Fitch noted.

CMS paid more than $100 billion to healthcare providers via AAP Programs through April 26 before suspending the payments.

AHA and other hospital groups are lobbying Congress to extend the timeline for repayment, but whether they will succeed is unclear.

Chip Kahn, president and CEO of the Federation of American Hospitals (FAH), said, “If the loan repayment terms aren’t fixed, this lifeline could become an anchor that sinks the recovery of hospitals across the country,” potentially affecting their ability to respond to a resurgence of the virus.

Losing all Medicare payments while repaying the loan would eliminate 25% of a hospital’s payments, on average, according to FAH.

The financial vulnerability of individual hospitals and health systems during the repayment period will vary widely based on the size of their advances and the share of their revenue that comes from Medicare. For instance, Fitch noted:

• HCA Healthcare received nearly $4 billion but had about $3.8 billion in available revolving credit and $731 million in cash.
• Tenet Healthcare received about $1.5 billion but will generate about $600 million in cash flow from operations in 2020.
• Universal Health Services received $376 million but has about $1 billion in projected 2020 cash flow.

FAH seeks changes to repayment terms

Although AHA is urging Congress to provide full forgiveness of the Medicare loans, FAH is seeking a series of less-comprehensive changes, including:

• Extending the start date for repayment from 120 days to at least 12 months
• Reducing the amount of repayment taken out of each Medicare claim from 100% to 25%
• Extending the repayment period from 12 months for hospitals (210 days for other providers) to a minimum of 36 months before interest begins to accrue
• Waiving the interest rate or limiting it to no more than 1%
• Resuming the program, which was paused on April 27
• Increasing the amount that can be advanced to hospitals from three or six months of Medicare payments to 12 months’ worth
• Allocating the funds from general Treasury revenues rather than from the Medicare Hospital Insurance Trust Fund
• Authorizing loan forgiveness in cases of hardship