Loan repayments could be tipping point for financially unstable hospitals

Up to 1 in 5 hospitals that received COVID-19 pandemic-related loans may be forced to restructure, consolidate or close as CMS begins to recoup the funds this month, hospital finance experts estimate.

Acute-care and critical-access hospitals received more than 80% of the $100 billion in accelerated and advance Medicare payment, which CMS will begin to claw back in August. Most providers have up to one year to repay the balance, and CMS will withhold 100% of fee-for-service Medicare payments until the loans are fully repaid.

Hospital associations are asking for those loans to be forgiven, or at least easing the interest rate and the repayment time line, both of which are included in House and Senate COVID-19 relief bills. They do not include any loan forgiveness provisions.

But many large health systems are flush with cash as a result of the federal funding, opting to save the loans rather than spend them.

Other providers—around 20%—have spent them on payroll or keeping their doors open and don't have reserves, said Jordan Shields, managing director at Juniper Advisory. Those with less than 80 days cash on hand will have a tough time repaying the loans, which could lead to bankruptcy, closure or consolidation, he said.

"If you are getting half or less than half of your Medicare reimbursement, you are going to burn through that cash and will be in real trouble. They can sell some ancillary services or pursue safety in a partnership," said Shields, adding though that those may not generate enough cash, or may take too long. "We are seeing some fairly stark projections around the bankruptcies we could see as a result."

Christopher Kerns, vice president of executive insights at Advisory Board, said that the 20% projection of hospitals that will struggle to pay back the loans is high, and he expects it to be less than 10%. Most hospitals accessed advanced payments to maintain liquidity and ensure they won't default on their loans. They will be be able to pay them back, he said.

"They have the ability to apply for extensions and the discretion CMS has is pretty wide, so there are a lot of ways they can draw them out if they need to," Kerns said.

But rural hospitals may not have as much flexibility, experts warned. More than 820 of around 1,330 U.S. critical-access hospitals received advanced payments, amounting to more than $3.1 billion in total, according to an analysis from the Chartis Center for Rural Health. The median operating margins for CAHs that received the loans was 0.3% as of Jan. 31, while the median cash on hand was 30 days.

Rural hospitals were managing thin margins prior to the pandemic, said Michael Topchik, national leader at Chartis. Of the 453 vulnerable rural hospitals, 237 are "at risk" and 216 are the least stable, according to a February analysis from Chartis. About 47% of the country's some 1,800 rural hospitals are operating in the red, up from 39% in 2015.

"Paying these loans back and maintaining financial viability is going to be next to impossible for many of these facilities," said Topchik, who expects to see bankruptcies and closures. "We have seen the writing on the wall with rural hospital closures and service-line degradation in the obstetrics and general surgery deserts. Services have been cut to the bone; I don't think there is a lot of fat left to trim."

"The last thing we want to see during a pandemic is a community hospital closing," Shields said.

Berlin, Mary.-based Atlantic General Hospital and Health System is a rural system that has been able to stash around $22.2 million of accelerated payments. The loans helped shore up cash liquidity, in addition to its expanded credit line, said Cheryl Nottingham, chief financial officer at Atlantic General.

In 2019, the system ended the year with 60 days cash on hand; that improved to 143 this year. The only circumstance that would require Atlantic General to spend its accelerated payments is if its cash flows dropped enough to potentially violate its bond covenant, she said.

"Our first wish would be forgiveness of the loans," Nottingham said, adding that was unlikely. "Extending recoupment to the end of the calendar year would be helpful—the second-best option would be any reduction in the interest rate."

Similarly, the Federation of American Hospitals have asked CMS to extend the repayment period, waive or limit interest rates, and increase the amount hospitals can receive in advance. The association also lobbied for allocating the funds from general Treasury revenues rather than the Medicare Hospital Insurance Fund, authorizing loan forgiveness in case of hardship and reducing the amount of repayment taken from each Medicare claim from 100% to 25%.

Some states, including those that expanded Medicaid, aren't feeling the pressure as acutely. Maryland is relatively unique because of its global budget system, which offers a lot of "different hydraulics at the federal and state government to try to maintain liquidity of hospitals in crises periods," Atlantic General CEO Michael Franklin said.

Atlantic General had to furlough about 20% of its full-time staff, which have since returned to work, pause capital projects, add capacity and boost its telehealth offerings.

"We were fortunate because we are a relatively small hospital and can get things done more quickly," Franklin said. "Because we are in a more rural area, the demand and impact of COVID has been a bit more delayed, allowing us prepare and adapt."

As the American Hospital Association claims that U.S. median operating margins could sink to negative 7% without additional support, some large systems have reported massive profits in the second quarter after cutiting expenses and securing federal funding.

Franklin, Tenn.-based hospital chain Community Health Systems had $1.71 billion cash flow from operations as of the end of the second quarter, stemming from $564 million in CARES Act grants and $1.2 billion of Medicare accelerated payments. That was up from $265 million in cash flow year over year. CHS recorded a $70 million net income attributable to shareholders in the second quarter.

Dallas-based Tenet Healthcare Corp. has received about $1.5 billion in Medicare advance payments. The hospital chain boosted its profit 200% during the second quarter.

One of Mark Armstrong's coworkers at consultancy LBMC said his clients are more flush with cash than he'd ever seen. But Armstrong, a shareholder at the firm, isn't seeing that amongst his clients.

"People I am talking with are all across the board," he said. "Some haven't spent a penny. Others that already had deferred accounts payable and were scrambling to make payroll before the pandemic don't have the money to payback the loans."

For the latter, this could be a tipping point that pushes providers to partner or merge with larger organizations, rework their clinical services or liquidate some ancillary assets, Armstrong said.

"Service lines that are boutique or aren't managed well can be a cash drain on an organization, and organizations have to evaluate whether to continue to do that anymore," said Armstrong, noting that is particularly prevalent in rural communities.

The Maine Hospital Association said that extending repayment time frame would allow its hospitals to appropriately adapt to future COVID-19 waves, communications director Becky Schnur said.

Whether Maine hospitals will be able repay the loans on time under the current framework, "We'll see," she said. "It all depends on what happens with the virus—will we be in lockdown again in November?"