In addition to audit of financials, due to the public health emergency, the CARES PRF is the first time many providers are also subject to a Single Audit^[1]. Furthermore, providers may also be subject to an audit from HRSA, depending on the reported use of PRF amounts^[2]. Providers are preparing for these audits by reviewing resources on the HRSA Cares PRF Website; including PRF Terms & Conditions, 6.11.21 Reporting Requirements, PRF FAQs, and information available through the HRSA PRF Reporting Portal.

Of note, HHS is providing audit guidance through the Office of Management and Budget (OMB) Compliance Supplement^[3]. Recently, OMB published its July 2021 Compliance Supplement^[4], with a to-be-released notice including additional audit requirements on the CARES PRF. Both the OMB guidance and HHS Instructions generally state PRF amounts are to recognize expenses or lost revenues in preventing, preparing, and responding to coronavirus. Table One lists categories of COVID-19 expenses provided by both OMB and HHS, having slight differences in descriptions.

Table One

Allowable PRF COVID-19 Expenses
OMB Compliance Supplement			HHS Reporting Instruction
	Building or construction of temp. structures			General & Administrative (G&A) Mortgage/Rent
	Emergency operation centers			G&A Insurance
	Retrofitting facilities			G&A Personnel
	Leasing of properties			G&A Fringe Benefits
	Medical supplies and equipment[5]			G&A Lease Payments
	Increased workforce and trainings			Other G&A
	Surge capacity			Healthcare Supplies
				Healthcare Equipment
				Healthcare IT
				Healthcare Facilities
				Other Healthcare

HHS provides comprehensive instruction for reporting on PRF amounts. However, other complex healthcare concepts remain unaddressed. For instance, PRF instruction allows certain costs, like supplies. Supplies are clearly distinguishable and supportable for audit. Conversely, other indirect costs are co-mingled within daily operations and are indistinguishable with audit support that would likely be subject to interpretation. There is no clear category (above, in Table One) to report indirect costs, unless they are reported as “Other Healthcare” – which HHS lists as a category, but not noted as a category on OMB’s Compliance Supplement.

Consider the indirect cost associated with excessive patient length of stay (LOS). While the PRF explicitly covers direct expenses, like associated supplies, the cost of a patient occupying the room is significant. During excessive LOS cases, patients receive sophisticated 24-hour care while incurring extensive laboratory tests, pharmaceutical treatment, and overhead costs. The occupied bed with excess LOS may occur during peak capacity, further preventing hospitals from seeing other patients in the same bed for a shorter stay of care. In addition to excessive LOS, other indirect costs like increasing employee burnout and turnover, and accelerated wear and tear on assets are adding to hospital costs.

Using precedent, Medicare recognizes indirect costs with the Indirect Graduate Medical Education (IME) program. The IME program subsidizes teaching hospitals’ additional costs associated with interns and residents (I&R) due to cost-inefficiencies (like excess lab-tests) incurred as an essential part of learning. Since there is no accounting mechanism clearly distinguishing I&R indirect costs, CMS developed its own convoluted formula identifying indirect costs for IME reimbursement. Other payers also recognize indirect costs, for instance, academic hospitals may be assigned an indirect cost factor when rate setting with state and commercial payers, and providers may apply for grants covering the indirect cost supporting novel care programs. Bottom line, indirect costs are actual and material. However, providers are concerned about the allowability of indirect expenses without a standard approach in how these costs are reported. How will HHS and auditors audit these costs under deviations in how they may be reported?

In one respect, reporting of indirect cost is important for some providers to retain current PRF and demonstrate need for future PRF allocations. In another respect, the ability to demonstrate these costs for all providers is paramount to record the true cost of COVID-19 to the entire healthcare industry. Table Two includes recommendations assisting providers evaluate and report of indirect expenses related to COVID-19.

Table Two

Recommendations for Reporting Indirect COVID-19 Costs
	Include a written narrative discussing indirect costs, with robust supporting workpapers.
	– Report indirect expenses as “other” healthcare expenses, ensuring this amount removes other amounts being reported to HHS as a direct COVID-19 expenses (to avoid double counting).
	Reduce the expense by all patient payments, such as outlier payments, that offset indirect costs (e.g., excessive LOS). It is important to account for this revenue against expenses in the event lost revenue in “Step 2” is not used for PRF. Any revenue offsetting expenses in Step 1 should not be accounted for in Step 2 revenue loss.
	Have open and continuous dialog with auditors, associations, other providers and industry leaders on COVID-19 expenses. Also consider discussing other “stranded costs” – like the increased cost of patient care providers – as it relates to current or future PRF.
	Refer to the HHS FAQ addressing marginal costs stating:
	– “The Provider Relief Fund permits reimbursement of marginal increased expenses related to coronavirus provided those expenses have not been reimbursed from other sources or that other sources are not obligated to reimburse”
	Evaluate areas of marginal costs not captured in the COVID-19 unit, including but not limited to:
	– costs related to excessive LOS
	– increase in sick and hazard pay
	– increase in screening and screening costs
	– increase in malpractice (and other insurance) costs
	– increase in PPE, pharmacy and lab cost
	Evaluate and remove marginal cost increases not related to COVID-19 (i.e., marginal costs from a new physician practice)
	Recall HHS views every patient as a possible case of COVID-19[6], providing an argument that each patient could be assigned COVID-19 expense.
	– For example, the hospital may have incurred costs for all patients – not just patients in the COVID-19 unit – related to excessive LOS (inability to discharge to post-acute care), with additional screening and housekeeping costs. These costs associated with patients in a non-COVID-19 unit should be considered for PRF reporting.

II. Reporting Patient Care and Other COVID-19 Revenue

As we have contemplated reporting indirect costs as a PRF expense, it is equally important to consider associated revenue impacted by COVID-19. Provider revenue is accounted for in two areas of CARES PRF reporting:

1. Revenue reporting against COVID-19 expenses in “Step 1”: accounting the use of PRF towards COVID-19 expenses net of “other revenue received (or obligated to receive)”
2. Quarterly revenue evaluation comparing CY 2020 and CY 2021 vs. quarterly amounts from CY 2019 in “Step 2”: accounting revenue loss towards the use of PRF.

Revenue against COVID-19 expenses in “Step 1” of PRF Reporting

HHS notably highlights it is the provider’s burden to subtract other COVID-19 revenue reimbursed or obligated to be reimbursed from another source from PRF expenses. HHS Instruction also requires providers to report categories of other assistance in a separate area of PRF reporting (per Table Three below). It is however unspecified if HHS expects the categories of “other assistance” to be the same amounts providers use to offset against COVID-19 expenses.

Table Three

HHS Categories of Other Assistance Received
	Department of the Treasury (Treasury) and/or Small Business Administration (SBA) Assistance
	Federal Emergency Management Agency (FEMA) Programs
	HHS CARES Act Testing
	Local, State, and Tribal Government Assistance
	Business Insurance
	Other Assistance

Absent from Other Assistance Received above in Table Three is mention of revenues directly related to patient care. In a PRF FAQ^[7] HHS asserts patient care revenue should not be reported as “other assistance received,” stating:

“Patient care revenue should not be reported as part of “Other Assistance Received” as it is a source of revenue, not a source of other assistance as defined by Provider Relief Fund reporting requirements.”

Omitting patient care revenue as “Other Assistance Received” is helpful so revenue amounts are not counted twice against PRF (offsetting expenses and again as patient care revenues). However, this instruction is perplexing and contradictory when reviewing an earlier HHS FAQ^[8] denoting sources of other revenue, including:

“…any amounts received through other sources, such as direct patient billing, commercial insurance, Medicare/Medicaid/Children’s Health Insurance Program (CHIP)…”

Perhaps this is a good time to reference OMB’s Compliance Addendum highlighting FAQs are not a reliable source of PRF instruction:

“Such guidance [FAQs] is issued to communicate an agency’s understanding of how the relevant statutes, regulations, or the terms and conditions of the federal awards to the extent they exist and apply to a particular circumstance, but it does not create new compliance requirements. Due to the evolving nature of the pandemic environment, it has been common for federal agencies to update, change, or delete their specific guidance over time…“

Recommendations Reporting Other Assistance Received

Providing recommendations under seemingly conflicting FAQs is challenging. Nevertheless, under the guise of recognizing all non-PRF COVID-19 payments, it is recommended amounts from HHS categories of “other assistance” (per Table Three) are used to offset COVID-19 expenses.

It is also recommended patient care COVID-19 revenue (e.g., CMS’ 20% DRG add-on, outlier payments, etc.) are accounted for in the determination lost revenue (quarterly revenue in 2020, 2021 vs. revenue in 2019). However (as discussed in Section I), providers reporting indirect costs have a caveat. In the event other revenue (like outlier payments) is related any reported indirect costs (e.g., excessive LOS), providers should account for this revenue in Step 1 to net against expense, and not double count in the Step 2 revenue tally. This recommendation is to ensure revenue related to any reported indirect costs is accounted in PRF reporting, especially in the event only expenses in Step 1 (and not lost revenues in Step 2) are used to absorb PRF.

Providers should maintain workpapers and open dialog with their auditors showing how all other COVID-19 assistance is accounted against PRF. An accompanying narrative supporting this approach, or any other reporting approach, is also judicious. The narrative should reference the specific applicable HHS Instructions and/or FAQ. Providers may choose to highlight that patient care payments are typically made on a per-discharge basis (i.e., Medicare IPPS), with no linear relationship to direct itemized expenses. Therefore, there is no correlation for reporting patient care revenue as “other assistance received” (reducing COVID-19 expenses in Table One), and this revenue accounted for in the determination of quarterly revenue loss in “Step 2” of PRF reporting.

Quarterly revenue loss accounted towards PRF in “Step 2” of HHS Reporting

In “Step 2” accounting for the use of PRF, providers have the option^[9] to report patient care revenue comparing quarterly amounts by payer from CY 2020 and CY 2021 against quarterly amounts from 2019. HHS PRF Reporting Instruction describes patient care revenue including amounts:

“prior to netting with expenses…health care, services and supports, as provided in a medical setting, at home/telehealth, or in the community.”

HHS PRF Instruction describes patient care revenue excluding amounts related to:

“non-patient care revenue such as insurance, retail, or real estate revenues (exception for nursing and assisted living facilities’ real estate revenues where resident fees are allowable); prescription sales revenues (exception when derived through the 340B program); grants or tuition; contractual adjustments from all third-party payers; charity care adjustments; bad debt; and any gains and/or losses on investments.”

Much of HHS’s revenue reporting requirements are straight forward. However, the instructions become murky when isolating patient care revenue impacted by COVID-19. For instance, providers may record revenue one period (i.e., Q2 of 2020), whereas the care relates to another period (i.e., Q3 of 2019). In order to provide an “apples to apples” comparison of patient care revenue, providers are evaluating whether to omit or reallocate these payments.

Importantly, HHS permits providers to remove skewed revenue per an FAQ^[10] regarding fluctuations in year-over-year net patient revenues due to settlements or payments made to third parties relating to care delivered outside the reporting period (2019-2021). HHS states:

“Provider Relief Fund recipients shall exclude from the reporting of net patient revenue payments received or payments made to third parties relating to care not provided in 2019, 2020, or 2021.”

The HHS FAQ above is surely helpful, yet concerns remain on unaddressed technicalities associated with misaligned revenue. In many cases, these concerns derive from multifaceted Medicaid supplemental payment programs. For example, providers inquire if they may:

• Realign and restate revenue within 2019 through 2021, representing the period(s) when care was provided (as compared to when revenue was recorded).
• Omit revenue from programs subject to CMS approval (i.e., renewal of 1115 Waiver programs). Although providers may receive interim payments, actual payments are not determined until CMS approves the respective program. Providers have limited or no means of assessing and reserving for these payments during PRF reporting periods until these programs are approved and rolled out by their respective States.

Recommendations Reporting “Misaligned” Patient Care Revenue

It is recommended providers account for misaligned revenue before reporting quarterly amounts to HHS. Re-appropriation of misaligned payments may provide a more accurate depiction of COVID-19 and its impact to provider revenue. For providers looking to report year over year changes as revenue loss (HHS PRF reporting “Option i”), it is important to discuss revenue adjustments with auditors. Providers and auditors should assess whether it is appropriate to report patient care revenue – adjusted for misaligned revenue – under “Option i” (year over year changes) or under “Option iii” (other). Reporting under option iii increases likelihood of HRSA audit, but also provides the opportunity to include a narrative to HHS. Regardless, a strong narrative and workpaper set is recommended for any option.

III. Reporting Targeted Payments Between Parent Company and Subsidiaries

Since April of 2020, providers received different types of CARES PRF allocations. HHS distinguishes these payments as “General” and “Targeted” allocations. General payments were appropriated to any provider agreeing to the Terms & Conditions of the CARES PRF and relate to funding from “Phases 1 through 3.” Targeted payments, specifically related to High-Impact, Safety Net and Rural, were only appropriated to providers HHS identifies as eligible for these payments. For instance, HHS determined providers eligible for Targeted Safety Net payments using (unaudited) Medicare cost report data from 2018/2019, and qualified hospitals based on thresholds related to disproportionate share (DSH), Uncompensated Care (UC), and profitability margins. Targeted Rural payments were disbursed based on provider status, utilization and expenses reported on Medicare cost report. Targeted High-Impact funding was determined by a qualifying threshold of COVID-19 patients. In large part, Targeted payments were applied using approximate data.

More accurate than using approximate data, health systems tap into their accounting systems and teams to pinpoint subsidiary providers especially impacted by COVID-19. In some cases, to direct funds to the greatest need, providers look to transfer Targeted payments from a subsidiary to the parent company. However, HHS reporting instructions are ambiguous regarding if and how subsidiaries may transfer Targeted payments to their parent company. HHS Reporting Instruction states:

“The original recipient of a Targeted Distribution payment is always the Reporting Entity. A parent entity may not report on its subsidiaries’ Targeted Distribution payments. The original recipient of a Targeted Distribution must report on the use of funds in accordance with the CRRSA Act. This is required regardless of whether the parent or subsidiary received the payment or whether that original recipient subsequently transferred the payment. A Reporting Entity that is a subsidiary must indicate the payment amount of any of the Targeted Distributions it received that were transferred to/by the parent entity, if applicable. Transferred Targeted Distribution payments face an increased likelihood of an audit by HRSA.”

Providers are confounded by the HHS instruction that “a parent entity may not report on its subsidiaries’ Targeted Distribution payments” while also stating “a Reporting Entity that is a subsidiary must indicate the payment amount of any of the Targeted Distributions it received that were transferred to/by the parent entity, if applicable.”

Furthermore, an HHS FAQ^[11] indicates parent companies have more latitude transferring Targeted payments so they may “control and allocate that Targeted Distribution payment among other subsidiaries that were not themselves eligible and did not receive a Targeted Distribution.” This FAQ also states, “the parent company may allocate the Targeted Distribution up to its pro rata ownership share of the subsidiary to any of its other subsidiaries that are healthcare providers.”

Hypothetically, assume a two-hospital health system with separate TINs.

• A is the parent entity and received $0 Targeted PRF
• Hospital B is the subsidiary and received $50M in Targeted PRF
• Hospital B transfers $20M in its targeted funds to Hospital A

HHS instruction is clear that $20M may not be reported by Hospital A (parent entity).

How then does Hospital B transfer these payments “to/by the parent entity, ” so that the proper entity reports on the use of $20M in funds?

Recommendations on Transfer of Targeted PRF

The primary recommendation concerning uncertainty is disclosure. It is recommended both the parent company and subsidiary include narrative and supporting workpapers on the transfer of funds. Transfer of Targeted funding should also be discussed during meetings with auditors. Hopefully, HHS will issue further guidance providing additional instruction or clarity on this reporting concern.

Ambiguity associated with $182.5bn in funding is not ideal, but – as we have learned – to be expected during the unprecedented events of COVID-19. The healthcare industry should continue to seek answers to hard questions, and at the same time provide crucial education to HHS, auditors, and anyone else in a decision-making position on PRF allotments. In the end, open communication, transparency, and solid workpapers are the best approaches for addressing the unknown.