Should Physician Practices Return Paycheck Protection Program Loans?

Paycheck Protection Program loans were designed to support small businesses during the unprecedented COVID-19 crisis, but many physician practices have been debating whether returning the loans is a better business decision in the long-run.

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Like many small businesses, physician practices have experienced significant financial hardships as a result of the pandemic. Patient volumes at practices dropped by an average of 60 percent since the country declared COVID-19 a public health emergency, and approximately 21 percent of physicians have been furloughed or taken a pay cut as a result of the pandemic, recent surveys showed.

The Paycheck Protection Program (PPP) has provided some much-needed relief for physician practices, even before HHS distributed $50 billion in emergency payments through the Provider Relief Fund. In a mid-April survey, about a fifth of primary care practices said they were likely to apply for one of the loans from the Small Business Administration (SBA).

But many physician practices are debating whether to return PPP loans before the May 14th deadline.

Healthcare is unlike other markets in which other small businesses operate, and that is creating uncertainty for practices, explained William W. Horton, partner and co-chair of the healthcare practice at Jones Walker LLP.

“What makes it particularly tricky for any healthcare services provider, not just physicians, is the nature of the revenue cycle,” Horton recently told RevCycleIntelligence. “There is a concern some providers have about the lag time between when they provide services and when they actually get paid. It maybe makes it look like they weren't certifying [their need for the PPP loan] in good faith if you look just at the April numbers.”

SBA has said in official FAQs that PPP loan borrowers must certify in good faith that their request is necessary to support the business’ ongoing operations. But this FAQ came much later than PPP loan requests from some physician practices, and the constantly changing regulatory environment has many practice leaders worried future guidance and FAQs could lead to a potential fraud investigation.

Healthcare organizations usually operate with a two-month lag between rendering a service and getting reimbursed by payers for that service. This means April numbers reflect services delivered to patients as far back as February when there were virtually no confirmed cases of COVID-19 in the US, according to CDC data.

Providers expect their May and June financial statements to reflect the loss of revenue from COVID-19, including significant losses from high-margin elective and non-emergent services that were canceled to protect staff and patients from exposure, Horton stated.

Those statements are also likely to show emergency payments from the Provider Relief Fund, which would suggest that practices had a lot more money in the bank that what they first certified on their PPP loan request.

“If you applied for PPP loans in the first wave of the program in early April, you had no way of knowing whether you would get a grant because HHS had not really announced any criteria,” Horton said. “You also had no way of knowing how much you would get because of the first $30 million they put out was based on every Medicare provider and what the ratio was of their 2019 Medicare revenue. There was no way to figure out the distribution to individual providers was going to be unless you knew what the denominator was and that's not information smaller providers are going to be able to estimate on a reasonable basis.”

Horton would like to believe that the federal government would not hold payments from the Provider Relief Fund against providers receiving PPP loans, especially given the on-the-fly regulations being drawn up to flesh out programs implemented immediately to support providers and other business owners.

But two days prior to the SBA’s deadline for returning PPP loans, the agency still had not indicated how it would review good-faith certifications. It was not until today – May 13th – that the SBA released FAQ 46.

FAQ 46 details how SBA will determine if borrowers requested PPP loans in good faith. The FAQ explained that any borrower that received a loan of less than $2 million will be deemed as having made the required good-faith certification concerning the necessity of the loan.

Borrowers with loans below the $2-million threshold are “generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans,” therefore will have certified their loan request in good faith, SBA explained in the FAQ.

All other borrowers, however, will face a review by the SBA. Although there is a chance to demonstrate that the loan was requested in good faith based on necessity, the agency stated.

The last-minute guidance addresses many concerns practices had regarding the loans and should provide relief for smaller organizations. Although unfortunately, it may be too late for many larger physician practices that returned the funds before the May 14 deadline but wouldn’t have if they knew how SBA would review good-faith certifications, Horton added.

For physician practices with PPP loans north of $2 million, the guidance also clarifies that SBA will let them know if their good-faith certifications are accepted. If the SBA determines the practice did not need the PPP loan, then the loan amount must be repaid after SBA’s notification or face further enforcement activity, Horton stated.

Documentation of how PPP loans and other government COVID-19 funds are spent will still be critical though, even though SBA cleared up many of the concerns practices had.

“Obviously, the purpose of the PPP loans was to help cover payroll expenses to mitigate against the need to lay off employees,” Horton said. “You want to be able to document that you're in fact spending the PPP funds on that so that you can take advantage of loan forgiveness.”