CMS expands advances on Medicare reimbursement. How should the advances be invested?

CMS, the Centers for Medicare and Medicaid Services, announced at the end of March that it is expanding its Medicare Accelerated and Advance Payment Program (AAPP). This means that any healthcare organization that is a Medicare provider can receive advance payments on future Medicare reimbursements. While those advance payments are short-term, for some organizations, they may be substantial enough to consider equally short-term investment options. We can help.

How the CMS expansion of AAPP works

CMS announced that it is allowing most Medicare Part A and Part B providers and suppliers to request advance payments on Medicare reimbursements, for either a three-month or six-month period, depending on the provider category.

To be eligible, a provider or supplier must meet the following four criteria:

  1. Have billed Medicare for claims within 180 days prior to making their advance-payment request.
  2. Not have any outstanding delinquent Medicare overpayments.
  3. Not be in bankruptcy.
  4. Not be under any active investigation for program integrity or medical review.

Most in-patient hospitals can request advance payments of up to 100% of projected Medicare payments for a full six-month period. Some critical-access hospitals can even request 125% of their advance for a six-month period. Other providers and suppliers will be limited to a three-month period.

While CMS has not yet released details on how it will calculate the amount of the advance payment, it will likely be based on past Medicare activity. But once the request is made, the advance payment may be available in as little as a week.

The provider can continue to submit claims as usual and receive full payments for their claims after the issuance of the accelerated or advance payment. And recoupment will not begin for 120 days. At the end of the 120-day period, the drawdown of the advance payment begins. In other words, instead of receiving payment for newly submitted claims, the provider’s outstanding balance of their advance is automatically reduced by the claim-payment amount. Most hospitals will have up to a year from the date the advance was provided to repay the balance, while other providers and suppliers will have up to 210 days.

To get full details, be sure to check directly with CMS.

Options for investing the advance

We see four investment options most plans will consider for their advances: simply holding cash, buying money market funds, an enhanced cash portfolio, or investing in laddered T-bills.

  • Cash is safe, fully liquid, but obviously provides no return. Still, for the most risk-averse organizations, this may be the best option.

  • Money markets in theory provide greater returns than cash. Keep in mind, however, that they had some memorable struggles when the Global Financial Crisis broke the buck, but we believe those threats are significantly lower. In addition, money market yields fluctuate. And there’s a small chance that a money market fund could become gated, thus not allowing access to the funds on the day the funds are needed.

  • An enhanced cash portfolio is also designed to achieve a higher yield and is comprised of a range of cash and short-term fixed-interest securities. The higher yield can also come with a higher cost and potentially higher risk as well. That said, this can be a good choice in some circumstances.

  • Laddered T-bills. This approach is designed to provide a high level of certainty of return, but with minimum cost and risk. Hospitals and other Medicare providers who activate these advances likely know approximately what their claims will be in four months, when the drawdown on the advance begins. So then, if a hospital estimates that they would need $15 million a month beginning on, say, September 15, they would purchase $15 million in T-Bills that mature on or slightly before September 15, and then do the same for consecutive months—laddering the maturity dates—until the six-month period is complete. One risk for such an approach would occur if the investor needed to sell the T-bills early, they would have to sell in the open market which could incur either a gain or loss.

What might a recovery look like?

How long might it be until such relief programs are no longer needed? It’s uncertain. But we have seen some small, uncertain green shoots on recovery. My colleague Paul Eitelman recently reported that data on coal consumption, railcar volumes, air pollution, etc., through early April all suggest China has been able to restore much of its factory output to more normal levels. Retail spending has been slower to come back online, however, even with most stores having already opened their doors. In Europe, Denmark, Norway, Austria and the Czech Republic appear to be at the front of the pack in planning the restarts of their economies. These will be important litmus tests for the outlook in the broader developed markets.

Broadly speaking, we believe that an economic reopening will likely be defined by three key characteristics:

  1. It will be slow. For example, in the United States, some states have closed their schools for the year through June, which will make it difficult for parents to fully return to their offices.

  2. It will be complicated. For instance, New York is coordinating with Connecticut and New Jersey on a regional get-back-to-work plan, given the interlinkages of their transit systems and economies.

  3. Done correctly, it will have to be careful. Rigorous testing, safeguarding vulnerable populations and a staggered approach will be likely, if not required.

The bottom line

Until that happens, many healthcare organizations need to make the most of the available relief. We believe they should consider accessing the expanded AAPP program from CMS. And for those who want to explore the best approach to investing that AAPP advance, we stand ready to help.