Hospitals and other providers will likely be eligible for new loans for mid-size businesses hurt by COVID-19 that would require borrowers to limit pay for highly-compensated employees and executives, according to the Federal Reserve.
The new Main Street lending program is funded by $75 billion from the Coronavirus Aid, Relief, and Economic Security Act. That means $600 billion in financing will be available to businesses with up to 10,000 employees or $2.5 billion in annual revenue. It remains unclear how many hospitals and other providers might qualify because the Federal Reserve did not specify how employees of health systems will be counted.
Borrowers could receive between $1 million and $25 million, but there are strings attached.
Businesses accepting the loans would have to freeze compensation for all employees making more than $425,000 and agree to pay cuts for employees making more than $3 million.
Those making more than $3 million would be paid the sum of $3 million and half of any excess above that amount that the employee was paid in 2019. Employee pay would be limited beginning when a loan agreement is executed and ending one year after it is repaid. Employees making more than $425,000 would not be able to receive severance pay larger than double their 2019 income.
The law would count salary, bonuses, stock awards and "other financial benefits" as compensation. The compensation limits would not apply to compensation determined by a collective bargaining agreement that was agreed to before March 1.
Although providers have their own $100 billion grant fund to offset COVID-19 financial stresses, American Hospital Association President and CEO Rick Pollack on April 3 asked the Federal Reserve to make sure hospitals were eligible for the loans and for compensation requirements to be relaxed.
"Hospital and health care organization 'employees' may include highly trained and accordingly highly compensated physicians and other medical personnel, whose employment is often governed by contract," Pollack wrote.
The loans appear to be looser on other restrictions Congress laid out. An AHA analysis of the loan terms said the loans appeared not to apply congressionally suggested requirements to make borrowers maintain 90% of their workforces and maintain union neutrality. Instead, borrowers are only required to make "reasonable efforts" to retain their workforces.
Small business loans administered by the Treasury Department applied affiliation rules that precluded businesses with fewer than 500 employees from qualifying for the assistance if they were affiliated with a larger system with power to control them.
The Federal Reserve has not yet specified whether similar rules will apply to the restrictions for mid-size business loans. Providers who qualify for the small business loan assistance can also apply for the mid-size business loans.
It's unclear how many providers would apply for the Main Street loans instead of turning to other options to boost their liquidity such as taking out additional lines of credit, issuing municipal bonds, or availing themselves of other grant and loan programs available under the CARES Act.
HHS began distributing $30 billion in grants from the CARES Act's provider relief fund on Friday, and CMS announced that as of Thursday it had paid out $51 billion in accelerated Medicare payments to providers.
The Federal Reserve is accepting comments on the Main Street loan terms until April 16. More loan programs are likely on the way, as the Trump administration still has not announced how it will spend around half of the $500 billion Congress set aside for corporate loan assistance.
"The Fed is clearly not out of ammunition, nor is it done exhausting its potential liquidity commitments based on the congressional backstop inside the CARES Act," RSM US chief economist Joesph Brusuelas wrote in an analysis of the new loan program.