On Thursday, October 29, HHS made the most substantial revisions to its Relief Fund Frequently Asked Questions document to date, adding or modifying 61 FAQs and deleting 78. Many of the deletions are related to the new or modified FAQs, as well as the updated Reporting Guidelines issued October 22, which we addressed here. However, not all of the FAQ revisions are related to the updated Guidelines. Relief Fund recipients are well-advised to review these changes carefully as they submit information for the Phase 3 window that closes November 6, consider revenue recognition issues for their financial statements and prepare for final reporting required by February 15.

Key takeaways include:

  • The FAQs effectively create a "greater of lost revenue or COVID-19 expenses" formula, NOT the sum of lost revenue and COVID-19 expenses.
  • The FAQs confirm lost revenue is based on typical concepts of revenue, not operating margin, but doubles down on a strict full year over year (2019 to 2020) determination of revenue decline with no option to utilize pre-COVD budgets or to make any "apples-to-apples" adjustments to "actual patient care revenue" to account for changes in operations (acquisitions, expansions, closures, divestitures, etc.)
  • Several of the new FAQs provide additional details about what expenses qualify as COVID-19 related expenses and how to determine what is "not reimbursed by other sources." However, there is still much to decipher around allocation of G&A or overhead costs, use of capital expenditures and potential offset for operational revenue and cost reimbursement as "other sources."
  • The FAQs further confirm that General Distributions, but not targeted, may be redeployed by systems of commonly controlled parent-sub entities regardless of which entity received the funds and/or attested to them.
  • There are a number of "housekeeping" type FAQs addressing the treatment of CHOWs, record retention and the treatment of interest earned on Relief Funds.

Discussion

Perhaps the most important (and controversial) aspect of these updates is the apparent overall formula for determining how retention of Relief Funds will be justified or confirmed under the reporting process. One new FAQ states:

The amount of lost revenues eligible for reimbursement through the Provider Relief Fund is capped at the change in 2019 to 2020 actual revenue from patient care related sources, less the Provider Relief Fund amount used to cover health care expenses attributable to coronavirus not reimbursed by other sources (emphasis added).

Working through different examples, this seems to mean that a recipient is always capped at the greater of lost revenue or expenses, rather than being able to add the two components together. The statute does use the phrase lost revenue or expenses but does not use any language suggesting a "greater of" approach and could be read to actually mean Relief Funds could be used for both - effectively meaning revenue and expenses. Even though the arduous process of determining direct and indirect expenses not reimbursed by other sources, may not increase total funding where lost revenue is greater, a new FAQ states that recipients must report both lost revenue and expenses (i.e., recipients do not have the option to report only one).

HHS is also doubling down on its definition of lost revenue based on a strict year to year comparison of actual patient revenue. Although HHS did NOT revert to the operating margin concept in the original September 19 Final Reporting Guidelines, the FAQ revisions remain consistent with the October 22 Update's use of actual revenue, not budgets. Multiple new FAQs expand on the year-over-year patient care revenue approach for calculating "lost revenue" described in the updated Reporting Guidelines. HHS added an FAQ specifically stating that recipients may NOT use a comparison to 2020 (or pre-COVID) budgeted revenues as a basis for calculating lost revenue. There are also no FAQs allowing for any adjustments based on operational or other changes that may have impacted a recipient's patient care revenue unrelated to COVID-19 (e.g., service line expansions, acquisitions, closing sites or service lines or divestitures). The FAQs also state that the lost revenue calculation must be based on patient care revenue for ALL of 2019 compared to 2020 and not completed on a quarter-by-quarter or other shorter-period comparison.

There are quite a number of FAQs addressing the determination of COVID-19 related expenses that are not reimbursed by other sources. One clarifies that capital equipment acquisitions are allowable only to the extent of the relevant depreciation under typical accounting practices - not the full capital cost. Presumably, a similar approach would apply to inventory items (e.g., personal protective equipment) - only the amount used and therefore expensed under normal accounting methods. Although some FAQs address the concepts of overhead and G&A costs, more guidance would be helpful, especially with respect to the reference that operating revenues may be an "other source" to offset against COVID costs. A new FAQ specifically addresses the concept of expenses attributable to coronavirus not reimbursed by other sources in the context of cost-reimbursed entities and seems to conclude general Medicare cost reimbursement would need to be offset against total costs for purposes of the Relief Fund reporting.

In recent guidance, HHS has consistently advised that General Distribution payments may be reallocated to related entities within a health system. The guidance, however, also stated that once a recipient entity (identified by TIN) attested to and accepted a General Distribution payment, that payment must stay with that specific recipient entity. This requirement always seemed unnecessarily restrictive, especially since many recipients attested to payments prior to HHS issuing any guidance about allocating funds across related entities. In a new FAQ, HHS revised its guidance to clarify that, for General Distribution payments, a "parent TIN" may use the money and/or allocate the money to other subsidiary TINs as it deems appropriate. This is regardless of which entity (the parent or subsidiary) attested to the receipt of the General Distribution payments. As a reminder, Targeted Distribution payments are not afforded the same flexibility and must remain with the legal entity that received the payments.

HHS added a new chart outlining reporting actions in the event of different change of ownership scenarios. Most of the information was already included in prior FAQS, but the chart provides some additional information that may be relevant to specific situations. The FAQs state that recipients need to retain original documentation for three years after the date of submission of the final expenditure report. Finally, the FAQs state that retention of interest earned on Relief Funds will also have to be justified in the same way as the original funding and, conversely, if Relief Funds must be repaid, then any interest earned on that amount must also be repaid.

Hall Render will provide additional updates as more information becomes available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.