Some healthcare providers have been frustrated to learn they can't include all of their federal coronavirus relief aid in their fiscal 2020 financial reports, which is crucial for some to meet their debt agreements.
Lawmakers have appropriated $175 billion in Provider Relief Fund grants to providers who suffered losses related to the COVID-19 pandemic. But the money comes with complicated and ever-changing accounting rules that are preventing some providers with June 30 year ends to include all of the aid in their fiscal 2020 reports. Since the end of the fiscal year is also when borrowers have to prove their financial standing meet requirements in their agreements with lenders, called debt covenants, that could be a problem.
"It may make or break their covenant if they can't include it," said Stacy Stelzriede, a partner with the accounting firm Moss Adams.
There are a few reasons why providers can't account for the money in fiscal 2020. For some, it's because the grant money came under a targeted distribution, which means it must be allocated to that specific entity—such as a hospital—and can't be used to support the organization as a whole.
That's the hang-up for Mosaic Life Care, a four-hospital system in St. Joseph, Mo. Chief Financial Officer Dwain Stilson said Mosaic had been under the impression they could aggregate the grants at the system level and use system-wide revenue losses to justify the need for the grants. Per new HHS guidance, that's not the case.
Since Mosaic has a June 30 year-end, the system had already completed its fiscal 2020 internal financial reports. When Stilson learned of that requirement, he had to go back and pull about 20% of the targeted grant revenue from the financial reports and defer the money until fiscal 2021, when those specific entities can prove they meet the terms. HHS rules say providers now have until July 31, 2021 to prove they meet the terms of the targeted grants.
"Technically, it will affect our (debt coverage) ratio, but we have enough coverage that we're not anywhere near at risk," Stilson said. "But I can imagine if there's an entity that's really close, they're going to be struggling with this guidance."
Providers whose fiscal years end in September or December aren't facing the same problem, as they have more time to meet the terms of the grants, Stilson said.
"Rarely in the lifespan of a healthcare organization will a fiscal year end matter as much as it does now," he said.
UW Health, an academic health system based in Madison, Wis., received some of its Provider Relief Fund grants in July, after leaders had already completed the fiscal 2020 financial reports for the year ended June 30. The money that came in July was specifically for "hot spot" hospitals with more than 161 COVID-19 admissions through June 10.
UW Health's Chief Financial Officer Bob Flannery said providers can only record those grants in their financial statements when they have accepted the terms and conditions, which they can't do until they receive the money. Of the roughly $80 million in Provider Relief Fund grants UW Health received, about $10 million will not be accounted for in fiscal 2020. The health system will still meet its bond covenants, but Flannery said that might not be true for other providers.
Accounting for the money in fiscal 2021 will give UW Health an unanticipated head start next year, but Flannery said he still thinks it would have made more sense to include the money in the year the budget crunch occurred.
"It would make sense to me as a finance person to say that grant should be pulled into the year in which those expenses, admissions occurred," he said.
Most not-for-profit and for-profit healthcare providers use accounting principles set by the Financial Accounting Standards Board. HHS has said under FASB, Provider Relief Fund grants should be categorized as operating income. Most bond agreements include operating income in the calculation of an entity's debt coverage ratio, which is used to measure compliance.
Such agreements don't typically allow non-operating income to be counted, which is how HHS is directing government-owned providers who use the Governmental Accounting Standards Board's principles to classify the grants.
For that reason, Stelzriede said she is encouraging providers to contact their lenders early to see if they will allow them to include the grants in their debt covenant calculations. If they can, get it in writing, she said.
"Intuitively to me it would seem it should count," she said. "But I don't know whether there's been positive results from those conversations."
Terms related to bank covenants tend to be less flexible than others, said Diana Lee, vice president and senior credit officer with Moody's Investors Service. However, Lee said she has heard of issuers having conversations with banks about their options if they don't expect to meet their covenants.
"By and large, many of them have said that the discussions with banks are going reasonably well," she said.
Lee co-authored a Moody's report in May that predicted the pandemic could prompt more hospitals to breach their debt covenants this year. It's too early in the year to learn whether that's been the case, she said.