The healthcare industry struggled to make ends meet during much of 2020. Even when coronavirus-related hospitalizations increased, healthcare systems, physicians, and a host of other providers reported sharp downturns in revenue, and many continue to struggle to this day. When President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law in March 2020, the Provider Relief Fund (PRF) was a welcome stopgap measure. The PRF provided direct economic support to healthcare entities who reported decreased revenues and/or increased expenses attributable to COVID-19. To date, the PRF has allocated almost $100 billion to healthcare providers across the nation.
Providers who were PRF recipients need to understand how to report and classify the support they received. But first, a little background about the PRF.
Distribution Phases
The U.S. Department of Health and Human Services (DHHS) was tasked with administering the PRF program. The DHHS has undergone three distribution phases of PRF support.
Phase 1
In April 2020, the DHHS began distribution under Phase 1 of the program. Over 330,000 providers who billed Medicare on a fee-for-service basis received combined support of $50 billion. The first round of Phase 1 funding was automatically allocated based on patient revenues from 2019, and the second round was based on revenue information submitted by the providers.
Phase 2
In June 2020, the DHHS initiated Phase 2 of the program. The DHHS made an additional $18 billion available to providers who applied for the program, at a maximum of 2% of revenues from patient care. The following providers were eligible: participants in state Medicaid/CHIP programs, Medicaid managed care plans, dentists, and certain Medicare providers, including those who were ineligible for (or missed out on) Phase 1 funding.
Phase 3
The Phase 3 rollout began in October 2020. In Phase 3, the DHHS made another $24.5 billion available to providers who applied for support. Those who already received funding in Phase 1 or Phase 2 were invited to apply for additional support under Phase 3, as were providers who were ineligible under the first two phases, like behavioral health experts and providers who began their businesses in 2020.
Recognition and Presentation of Provider Relief Funds
PRF funds meet the criteria for treatment as grants subject to compliance with that stated terms and conditions. Nonprofit entities and governmental entities have clear-cut guidance for timing of reporting and presentation of grant revenues, but the guidance for for-profit entities is a bit murkier.
Nonprofit Entities
Nonprofit entities should treat PRF support as a nonexchange transaction. Accounting Standards Codification (ASC) Subtopic 958-605 provides guidance on when a conditional contribution (like a government grant) should be recognized. Under this Subtopic, nonprofits must ascertain if there is a barrier they must overcome before the transfer of assets is complete.
For example, if the DHHS requires the entity to pay for only eligible expenses from grant funds, only once those expenses have been incurred should the nonprofit recognize grant revenue during the reporting period.
When they do report the revenue, nonprofit healthcare entities should present these funds on the statement of operations and changes in net assets as they would present other contributions. While FASB standards are less prescriptive than the governmental guidance, most nonprofit providers report governmental grants and other nonexchange transactions as a component of other operating income above their income from operations performance indicator on the statement of changes in net assets.
Governmental Entities
Like nonprofit entities, governmental entities should treat PRF support as nonexchange transactions. Under the Governmental Accounting Standards Board (GASB) Statement No. 33, the revenue from a nonexchange transaction should be recognized when the underlying expenditures are incurred. If there is any excess award that cannot be used as per the PRF program’s terms and conditions, the entity should be prepared to repay that portion to the DHHS and therefore should not recognize that portion as revenue on the Statement of Activities.
But governmental entities classify PRF support differently on their financials. The GASB classifies PRF support as subsidies. When reporting subsidies, governmental entities should report those funds as nonoperating revenues.
For-Profit Entities
The guidance for for-profit entities is less clear cut. There is no Generally Accepted Accounting Principles (GAAP) standard on how or when to recognize grant revenue. For-profit entities must select a revenue recognition model that the underlying facts and conditions. The chosen method must be applied consistently to similar revenue streams. The most common method for recognizing governments grants as revenue is to analogize International Accounting Standards (IAS) 20 to PRF receipts. Under IAS 20, government grants should be recognized when there is reasonable assurance that the grant will be received and that all the conditions will be met.
When the revenue does make its way to the income statement, for-profit businesses – yet again – have a few different options for presenting the information. Like nonprofits, they can record PRF revenue as Other Operating Income, or they could show the revenue as a reduction of expenses that the funds were intended to help cover if the IAS 20 guidance is followed.
If you have questions about how to reflect PRF support on your financials, contact a member of LaPorte’s Healthcare Industry Group today.