CARES Act may offer relief for medical practices, but raises questions for private equity-backed practice management companies

Healthcare private equity sponsorships of physician practices and practice management companies has been one of the most dynamic sectors in the healthcare industry during the past five years. As with most industries, however, much of this M&A activity came to a halt in March 2020 as the United States pivoted from its robust economy to focus on a campaign against the spread of coronavirus disease 2019 (COVID-19) through social distancing, quarantines, and the closure of all non-essential businesses (though certain physician practice and practice management M&A deals are continuing despite the pandemic). 

Physician practices and practice management companies are now seeking ways to maintain their economic viability. While many have considered drawing on credit facilities, terminating or furloughing employees, or otherwise pursuing deferral or forgiveness from lenders and vendors, many are now turning to the recently enacted CARES Act to assess whether they qualify for government loans or grants.

Three major programs under the CARES Act may be a resource for a physician practice or practice management company. First, the $349 billion small business Paycheck Protection Program (“PPP Loan Program”) allows companies with fewer than 500 employees (subject to the application of the affiliation rules) or that otherwise fall under the size threshold for certain primary industry classifications to generally access the PPP Loan Program.^[1] Second, the CARES Act allocates $100 billion to the Public Health and Social Services Emergency Fund (“Public Health Fund”) to reimburse eligible healthcare providers for healthcare related expenses or lost revenues that are attributable to COVID-19. Third, in addition to the initial expansion in the Cares Act, on March 28, the Centers for Medicare & Medicaid Services (CMS) announced an expansion of its accelerated and advance payment program for Medicare-participating healthcare providers and suppliers. 

While uncertainty remains, medical practices and practice management companies are urged to consider these options and whether their association with a private equity sponsor, if applicable, may bolster or hinder their qualification for one or more of these programs.^[2]

A.        PPP Loan Program

1.         SBA loan proceeds

Assuming a medical practice or practice management company is eligible for the PPP Loan Program, a key question is how much can it obtain. The loan size is equal to 250 percent of the average monthly payroll for the one-year period prior to the loan with an aggregate $10 million cap.  If, however, a company was not in business from February 15, 2019 to June 30, 2019, then the loan size is based upon 250 percent of the average monthly payroll costs between January 1, 2020 to February 29, 2020. 

Given the significance of payroll for determining the loan amount, it is important that a healthcare company pay special attention to what can be included versus what should be excluded in its calculation. Examples of what can be included are (i) any salaries, wages, commissions, or similar compensation; (ii) certain group healthcare and retirement benefits; and (iii) accrued paid time off for family, medical, vacation, sick or parental leave. 

There are two key areas of focus in calculating the payroll of a medical practice and/or practice management company. First, the PPP Loan Program requires employee compensation, for purposes of the calculation, to be capped at $100,000.00 on an annualized basis for each employee.  Given that a majority of physician salaries and other personnel may exceed $100,000.00, special attention should be given to these calculations. Second, much of the workforce in private equity-backed physician service platforms may be employed by a practice management company. Indeed, all employees other than those required to be employed by the medical practice (i.e., doctors) may be employed by the practice management company.  Payroll, however, may include any “similar compensation” or “payments to independent contractors.” If a practice management company is ineligible to participate in the PPP Loan Program for affiliation or other reasons, determining whether the medical practice may include the cost of the practice management company’s payroll may be an important determinant in assessing the practice’s eligibility for relief.

2.         Loan forgiveness

For a loan under the PPP Loan Program to be forgiven, in whole or in part, the SBA lender will consider an applicant’s use of the loan proceeds and its number of employees during the eight week period following the loan origination relative to the average number of employees in one of the time periods referenced above (i.e., February 15, 2019 – June 30, 2019 or January 1, 2020 – February 29, 2020). Specifically, loan proceeds used for payroll costs, interest payments on mortgages, rent, and utility payments are all qualified uses for loan forgiveness. The amount of the loan forgiven will further depend on whether the applicant has reduced its total number of employees or reduced any employee’s salary by more than 25 percent and whether no more than 25% of the loan proceeds are being used for non-payroll expenses. Based on the foregoing, the loan will be forgiven in whole or in part based upon multiplying the applicant’s costs eligible for forgiveness during the eight-week period following the loan origination by a fraction, the numerator of which is the average full time equivalent (FTE) per month during such eight week period, and the denominator of which is the average FTE/month during either February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020.

3.         Small business qualification and ownership affiliation rule

As businesses pursue relief under the PPP Loan Program, a unique set of challenges and opportunities may arise for private equity-backed physician practice management companies and their associated medical practices. As of the date of this publication, the application of the affiliation rules to determining eligibility under the PPP Loan Program remain unclear. Further guidance is expected to be issued by the SBA on April 2nd or 3rd that may limit the rules application. However, if the affiliation rules apply, a loan applicant would be required to aggregate its employees with those of any affiliates in determining whether it has fewer than 500 employees, subject to certain industry exceptions.^[3]

An “affiliate” includes an investor that owns 50 percent or more of the equity of company. If a private equity fund owns 50 percent or more of a physician practice management company and that company doesn’t otherwise fit into an industry classification that allows for a departure from the size of head count test, then the physician practice management company must include the employee count of the fund and possibly its other portfolio companies in determining its employee head count. Thus, a practice management company that at first glance appears to fall well below the 500 employee threshold may very well exceed that threshold due to the affiliation rules. In addition to the industry classification, there are some other nuanced exceptions to the affiliation rule particularly for companies that have received funding from a registered Small Business Investment Corporation or that are otherwise a part of a franchise.

An “affiliate” further includes a person that has certain control rights irrespective of their ownership percentage. Thus, even where a fund or other strategic partner owns less than 50 percent of a physician practice management company, the number of employees may still need to be aggregated depending on the level of control that the fund may have over the physician practice management company.

4.         Management and economic dependence affiliation

At first blush, it may seem daunting for a private equity-backed physician service platform to be eligible for the PPP Loan Program. The uniqueness of a medical practice’s relationship with a practice management company, however, may present some relief. Under certain circumstances, the medical practice may still be eligible for the PPP Loan Program. Due to the corporate practice of medicine doctrine and other licensure and regulatory issues distinct to the healthcare industry, most private equity-backed management companies are not permitted to own the underlying physician practice. Rather, the relationship is purely contractual in nature.

The management company typically furnishes and administers the non-clinical and business aspects of operating the medical practice, thereby allowing the practice physicians to focus exclusively on the management and provision of clinical care. In such instances, the practice typically continues to be owned 100 percent by one or more physicians independent of any ownership by the private equity fund.  As a result, the physician practice may still be eligible under the PPP Loan Program even where the practice management company may otherwise not because of its affiliation with a private equity fund.

The analysis is fact intensive in assessing whether a medical practice is truly independent of the physician practice management company. While we anticipate further guidance from the SBA, the existing PPP Loan Program regulations provide some insight into whether the SBA would deem a medical practice to be independent of or an affiliate of the practice management company. 

Notably, the SBA has broad discretion to determine whether a loan applicant is eligible for the PPP Loan Program and may consider the totality of the circumstances. A key factor to consider in assessing whether affiliation arises from a management relationship includes whether the medical practice and management company share the same board or officers. Affiliation may also arise depending on the level of control exerted by the management company over the medical practice through the management agreement. 

State corporate practice of medicine healthcare laws may actually lend support to the medical practice’s independence. For example, New York has stringent corporate-practice-of-medicine regulations and requires a medical practice to have multiple degrees of separation and independence from a practice management company. In contrast, Florida may permit the direct ownership of a medical practice subject to certain state licensure laws. Assuming the parties have been mindful about maintaining the separation and distinction between the medical practice and the management company to comply with the applicable state’s corporate practice of medicine doctrine, it is possible that the medical practice may be well positioned to be eligible for the PPP Loan Program. Ultimately, the duration of the management arrangement, the comprehensive scope of the services, whether or not the management company engages in any clinical functions (e.g., purchasing pharmaceuticals), the extent of control exerted by the management company over the ultimate disposition of the ownership of the medical practice through equity transfer restriction agreements, commonality of ownership, and the inclusion of affirmative or negative covenants requiring the management company’s approval over certain decisions all factor into whether a medical practice will be deemed independent of a practice management company and be eligible for the PPP Loan Program.^[4]

The traditional SBA affiliation rules also deem an affiliation to exist if the practice management company derives more than a certain percentage of its receipts from the medical practice over the past three years unless the management company is free to manage other medical practices. Although a practice management company may derive virtually all of its revenue from the practices it manages, if it is managing multiple practices, however, it may fall under the receipt threshold. Moreover, the management company is usually free to enter into management arrangements with other medical practices despite the medical practice being required to exclusively engage the management company. Accordingly, there may be a number of instances where this affiliation rule would still permit the medical practice to be eligible for the PPP Loan Program depending on the facts and circumstances.

Often, the physician owners of the medical practice may also have an ownership interest in the practice management company and/or serve on the board or as officers of the management company. These factors can give rise to an affiliation depending on the level of ownership, number of board seats, and veto rights that the physician owners may have with respect to the management company. Ultimately, the SBA may still view the practice management company and medical practice as economically dependent on one another through the contractual relationships resulting in an affiliation. Accordingly, a careful analysis and screening of a broad array of factors may be crucial in assessing whether a medical practice may be eligible for the PPP Loan Program even where the practice management company may otherwise not.          

5.         Disclosure and false claims

While multiple government officials have proclaimed the ease, accessibility, and expediency of the PPP Loan Program, the loan application is expected to require certification by an applicant of the truthfulness and accuracy of provided information, including eligibility based on the size test (i.e., fewer than 500 employees). If the practice is truly separate and unaffiliated, then pursuing a loan under the PPP Loan Program may be prudent. However, if a practice does not satisfy the affiliation test (however applied) with respect to a management company, and, in turn, the practice management company is deemed an affiliate of a private equity sponsor resulting in more than 500 employees, then the risk profile of signing a certification and accepting the loan may bring material consequences, including the potential for criminal and False Claims Act implications. Accordingly, applicants are urged to consider the underlying facts of their business and include disclosure of the management relationship to the SBA lender. At a minimum, taking affirmative steps to ensure proper disclosure of any relationships may mitigate some of these risks.

B.        Public health fund

The CARES Act allocates $100 billion to the Public Health Fund to “reimburse, through grants or other mechanisms, eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus.” Healthcare providers are eligible to receive compensation for costs incurred in the course of providing medical services, if such costs are not compensated by a third-party payer. The Public Health fund allows healthcare providers participating in Medicare and Medicaid to apply for grants. In addition, this fund, among many others, could pay for the costs of building temporary facilities or leasing properties to expand bed capacity, along with obtaining medical supplies, equipment, testing supplies and training. The Secretary of Health and Human Services (HHS) has broad authority and discretion to determine payment eligibility and the amount of such payments.

We highlight below a few key provisions that relate to how this fund is expected to be managed and how healthcare providers may be held accountable:

• Funding is not limited to costs or expenses but also to lost revenues, however may not be used to reimburse expenses or losses that have been reimbursed from other sources.
• Examples include lost revenue from cancelled procedures, medical supplies, personal protective equipment testing and increased staffing or training.
• “Lost revenues” is not defined, but providers should estimate revenue and lost margins, including cancellations for services or elective procedures, including lower volumes, lower patient census and replacing higher margin service line with lower margin service lines.
• While it appears that the funds will be directed primarily to hospitals, the term “eligible health care providers” may apply to a broad range of health care providers and suppliers, including physician offices, medical clinics (e.g., nurse practitioner offices), hospitals, rehabilitation facilities, skilled nursing facilities, ambulatory surgical centers, home healthcare agencies, hospices, urgent care centers, single standing emergency centers and any others that “provide diagnoses, testing, or care for individuals with possible or actual cases of COVID-19.”
• To be eligible for payment, a healthcare provider must submit an application that includes a statement justifying the need of the provider for the payment.
• The bill directs the Secretary of HHS to release guidance on the application process and required documentation which we anticipate will be prepared in the foreseeable future. 
• The term “payment” is defined as a “pre-payment, prospective payment, or retrospective payment as determined appropriate.” Healthcare providers should be mindful that prospective payments could come in the form of grants premised on estimated or projected costs and lost revenues. Initial payments made could be subject to subsequent audits or accounting to true up the actual or more accurate amount.
• As more guidance develops, healthcare providers are urged to maintain documentation of COVID-19 related expenses.

C.  Accelerated payments to increase liquidity and the CARES Act

To mitigate the adverse impact of poor cash flows, CMS has expanded its Accelerated and Advance Payment Program to a broader group of Medicare Part A providers and Part B suppliers citing a need to support organizations on the frontlines battling COVID-19. The Accelerated and Advance Payment Program from CMS generally provides emergency funding calculated based on past payments if a disruption in claims submission or claims processing occurs. Expedited payments are normally offered during natural disasters, such as hurricanes, tornadoes or earthquakes and are relatively rare.

However, in an unprecedented decision, CMS has expanded the program for Medicare providers throughout the country during the public health emergency related to COVID-19 as part of the CARES Act. This expansion applies to all hospitals, physicians, durable medical equipment suppliers and other Medicare Part A and Part B providers and suppliers. Depending on the type of provider or supplier, the provider/supplier may request up to 100-125 percent of the Medicare payment amount for a 3-6 month period. 

1.         Amount of payment and duration

According to CMS, most providers and suppliers will be able to request up to 100 percent of their Medicare reimbursement amount for a three-month period.

In addition, certain providers such as inpatient acute care hospitals, children’s hospitals, and certain cancer hospitals are able to request up to 100 percent of the Medicare payment amount for a six month period, while critical access hospitals (CAH) can request up to 125 percent of their payment amount for a six month period.

2.         Eligibility

To qualify for accelerated or advance payments, providers and suppliers must  have billed Medicare for claims within 180 days immediately prior to its request and must not have filed for bankruptcy. Providers and suppliers with outstanding delinquent Medicare overpayments or under active medical review or program integrity investigation are also ineligible.

3.         Application and processing time

CMS has announced that it will start accepting and processing the accelerated and advance payment requests immediately. The agency, through its Medicare Administrative Contractors (MAC), anticipates that it will issue payments within seven days of a provider’s request.

4.         Repayment

After 120 days from when they receive an accelerated payment, providers and suppliers will then have 210 days to repay their balance. Given the likelihood for larger payments to hospitals and CAHs, CMS will allow up to one year from the date the accelerated payment was made to repay the balance.

5.         Recoupment and reconciliation

Providers and suppliers can continue to submit claims after the issuance of the accelerated or advance payment. However, any repayment obligations do not exist for 120 days so any recoupment efforts by CMS will be invalid during that time. Also, providers and suppliers should receive full payments for submitted claims during the 120-day delay period. After the 120-day period has ended, the recoupment process will begin, and any submitted claims by a provider or supplier will be offset from the new claims to repay the accelerated payments. Consequently, providers and suppliers should expect a reduction in the amount of newly submitted claims equal to any accelerated payments received. This reduction offsets the outstanding amount owed to CMS due to the accelerated payments.

For hospitals and CAHs, the MACs will conduct an audit to determine any amounts owed to CMS.  If a MAC determines any amount is owed, it will send a request for repayment of the remaining balance, which is collected by direct payment. Any Part A providers not specifically identified by CMS and Medicare Part B suppliers will have up to 210 days for the reconciliation process to begin.

For Medicare Part A providers that receive Period Interim Payments (PIPs), the accelerated payment reconciliation process will happen at the final cost report process (180 days after the fiscal year closes).

6.         Step-by-step guidance on requesting accelerated payments

The request forms vary by individual MACs and the request forms are readily available on each MAC’s website. After filling out the forms, providers and suppliers may submit it to the MAC either via e-mail or postal mail. However, it is recommended to contact the MAC to verify the preferred method of delivery, as it may impact the timeliness of applications being processed.

The actions taken by CMS demonstrate its willingness to foster additional relief actions on behalf of providers and other Medicare organizations.

Conclusion

The PPP Loan Program remains the primary focus of providers and practice management companies seeking much-needed liquidity. It is anticipated that the loan program will be accessible as early as Friday, April 3, 2020. 

However, the PPP Loan Program is available to small businesses in virtually all industries and not just healthcare. In contrast, the Public Health Fund grants will be allocated solely to hospitals and other eligible healthcare providers. The CARES Act remains an unprecedented piece of legislation for which much additional clarity is being sought. As medical providers and practice management companies (including those