‘Public Shaming,’ Audit Concerns Prompt Encompass Health to Return $237M in CARES Act Funding

Encompass Health Corporation (NYSE: EHC) has returned the $237 million in emergency provider relief it received from the Department of Health and Human Services (HHS) as part of the CARES Act.

Encompass Health’s move is one many home health providers are considering, as confusion around terms and conditions of the funding has operators fearful of an eventual “day of reckoning.” The concern is that agencies could eventually have to pay some of the money back. 

That’s just one of several reasons Birmingham, Alabama-based Encompass Health decided to return the relief, company leaders explained during a Tuesday presentation at the UBS Virtual Global Healthcare Conference.

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“At the end of the day, we just felt, as a well-capitalized company, we had access to a variety of funding resources,” Encompass Health CEO Mark Tarr said during the presentation. “We just thought it was the best decision for Encompass Health to return the funds.”

Encompass Health is one of the country’s largest post-acute care companies, with a variety of facility- and home-based service offerings. It has 134 hospital locations, 245 home health locations and 83 hospice locations in 37 states and Puerto Rico.

As a result of the CARES Act — which set aside $100 billion in grant-type relief money for health care providers — Encompass Health received funds at 209 separate entities under its corporate umbrella, with funding coming in two separate tranches.

Those details made things complicated and contributed to the company’s decision to return the money, CFO Doug Coltharp explained during the UBS presentation.

First of all, the two funding disbursements Encompass Health received came with differing methodologies, leading Coltharp and his colleagues to believe the company had been overpaid. Instead of $237 million, Encompass Health should have received closer to $80 million, Coltharp said.

On top of that, the company was unsure how the funding must be used on a facility-by-facility basis. Encompass Health leadership even sought guidance from HHS, to no avail.

“We could not get any assurances that there would not be a continuing requirement to utilize the funds, report on the funds [and] be audited on the funds, etc., at that entity level at which it was received,” Coltharp said. “That would have both limited our ability to fully utilize the now $80 million — because not every one of those entities was equally impacted by COVID-19 — and it also would have imposed a very significant administrative burden and potential risk on us.”

On top of that, Encompass Health officials believe the funding would have been subject to federal income taxes and that it could have interfered with other COVID-19 reparations down the line, namely a business interruption insurance claim.

Coltharp believes at least a portion of the damage sustained as a result of the coronavirus could be subject to such a claim.

“That’s going to be a controversial topic and likely will take years to process a claim like that,” he said. “But if … we were pursuing any such claim, that would preclude us from using at least a portion of whatever funds we had retained.”

Finally, Encompass Health officials took concern with the attestation required to accept the funds, saying it was too open-ended for their liking. Specifically, they worried about the government being able to add additional terms and conditions for providers even after they’ve accepted the funds.

Beyond that, it came down to an issue of reputation, with company leaders citing concerns that lawmakers in a post-coronavirus world could regret deploying the funds to certain organizations.

“You may find yourself, as a publicly traded company … on a public shaming list,” Coltharp said. “That was just a risk that … we did not believe was in the best interest of our shareholders.”

COVID-19 upside

Despite returning the emergency relief funding, Encompass Health remains in a relatively good place as the coronavirus rages on, company leaders said on the UBS presentation.

In addition to being well-capitalized, the company’s volumes are on the upswing again, after they started to decline in mid-March, with that trend bottoming out in April. Plus, demand for post-acute care services like those Encompass Health offers is only predicted to increase as COVID-19 continues to devastate the nation.

“And as a result, we’re not pulling back on any of our capacity expansion plans,” Coltharp said. “To the contrary, we’re plowing forward with those.”

That demand is especially evident on the home health front, which has been receiving increased recognition as the site of care that keeps seniors safest amid the coronavirus. Despite the exasperating effect the virus has had on the recently implemented Patient-Driven Groupings Model (PDGM), it’s a space about which Encompass Health remains bullish.

“People already had chosen the home setting as a preferred setting to receive care if available to them,” Tarr said. “COVID-19 only pushes that trend forward. I think it’s very sound for home health and the outlook there.”

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