As of March 2023, after more than two years of uncertainty, Nursing Facilities, Assisted Living, and other critical, Medicaid-funded long-term care facilities (LTCFs) can finally breathe a sigh of relief, confident that the Employee Retention Credit (ERC) will not be offset for the purposes of rate setting. For too long, CMS had been responding to these providers’ ERC-related inquiries with the instruction that ERCs should be treated as any other tax credit. Such treatment meant that many facilities were seeing significant rate reductions in their recent rate notices. Now, the Centers for Medicare and Medicaid Services (CMS) has clarified that states with cost-based care center payment systems will treat ERC funds like a one-time grant, similar to other CARES Act relief measures (e.g., PPP loans and Provider Relief Funds).
Medicare and Medicaid Cost Reports are used to establish provider rates. The determination utilizes price-based reimbursement methodologies, which in-turn are based on historically reported cost to approximate the cost of providing future services. If a non-recurring funding source is applied against current cost—reducing future Medicaid rates in the eventual absence of ERC funds—the result is the creation of artificially low rates. Moreover, since Medicaid rates themselves are frequently calculated based on state-wide averages, even those providers who never received ERC would be negatively impacted.
Until last month, CMS had responded to some states’ ERC-related inquiries by explaining that ERC refunds are to be treated as any other tax credit, citing the Provider Reimbursement Manual (PRM), Part 1, Chapter 21, Section 2122.7, added by Transmittal 448, which states:
Review of Reasonable Costs, Including Taxes.--In general, reasonable costs claimed by a provider, including taxes, must be actually incurred. While a tax may fall under a category that is generally accepted as an allowable Medicare cost, the provider may only treat the net tax expense as the reasonable cost actually incurred for Medicare payment purposes. The net tax expense is the tax paid by the provider, reduced by payments the provider received that are associated with the assessed tax. Contractors will continue to determine whether taxes and other expenses are allowable based on reasonable cost principles set forth in the Medicare statute and regulations.
The initial CMS position caused great concern among providers, who believed that ERC funds should be treated as a grant for Medicaid cost reporting purposes in the period ERC refund claims are submitted—not offset against costs. Instead, they emphasized guidance for grant reporting from PRM, Part I, Chapter 6, Section 600:
Principle.--For cost reporting periods beginning on or after October 1, 1983, grants, gifts, and income from endowments, whether or not the donor restricts the use for a specific purpose, are not deducted from a provider’s operating costs in computing reimbursable cost. For periods beginning prior to October 1, 1983, restricted grants, gifts, or endowment income designated by a donor for paying specific operating costs were deducted from the particular operating cost or group of costs.
Providers also maintained that the CARES Act’s primary sources of financial assistance for health care providers are intended, “[t]o provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”2 Accordingly, ERC should be treated in the same fashion as forgiven PPP loans or Provider Relief Funds—i.e., as a grant rather than an offset against costs.
CMS has finally clarified that ERC will be treated as a grant and not offset against costs. This approach echoes CMS guidance used for PPP loan forgiveness and PPF treatment and prevents artificially lower base rates for all providers (whether or not they received ERC). Additionally, we believe this treatment will motivate potentially eligible LTCFs (and other similar operations) to consult with trusted tax professionals about the ERC—specifically, how they may claim much-needed relief which is still available through that credit.
We understand that the pandemic hit some industries harder than others, and it’s fair to say that long-term care facilities and similar employers were some of the hardest hit.3 Many of these employers are still struggling to make a full comeback, and we urge them to consult a professional to determine whether they are eligible for ERC relief. Even though many of these employers may not have experienced a decline in gross receipts—especially if they received increased funds via Medicare during the pandemic—this does not mean they should conclude that they are ineligible for potentially business-saving ERC relief. ERC was enacted to award employers, including those in this industry, who retained employees during the pandemic a significant, refundable tax credit—up to $26,000 per employee. LCTFs who may be eligible for ERC will now be more motivated to apply for ERC, because they will no longer have to offset ERC against costs when rates are set.