Health Law Advisor

The coronavirus is having a direct effect – financial and otherwise – on nearly every business.  While the long-term effects of the global pandemic will be significant and far-reaching, the short-term financial consequences to businesses, due to expected cash shortfalls, could make the difference in a company’s survival.  Here are four areas that businesses should review that could impact – and potentially improve – their financial situation:

• Lease arrangements – Landlords may be willing to accept a temporary reduction in rent rather than risk losing a good, long-term tenant, and otherwise reliable income stream, altogether. This can usually be accomplished by a simple amendment to the lease agreement.
• Debt covenants – Companies that have credit facilities often are subject to debt covenants in favor of the lender that are tested periodically.  Typical debt covenants that could be violated in times of financial crises include minimum financial tests, or ratios, based on a company’s income, assets, working capital, net worth and equity.  Covenants that consist of operational milestones could be impacted as well.  It’s good practice for companies to approach their lenders and seek amendments (or temporary waivers) to their covenants before those covenants are tripped, rather than afterwards, when the company is in default.

The ongoing pandemic caused by the novel coronavirus has upended the American health care system in many ways. One of the many effects of COVID-19 will likely be substantial disruption in value-based payment arrangements between health plans and providers. Though this is an issue that is not on the top of providers or payors minds as the health care system prepares to respond to the crisis, there are some simple steps that providers can take now to avoid issues in the future.

Any iteration of value-based payments (“VBP”) is likely to be disrupted by COVID-19; be it shared savings, shared risk, or full risk arrangements. Quality targets and reporting deadlines are likely to be missed as providers move many routine and preventative services to telehealth services or suspend them entirely for the time being, as well as turn the bulk of their clinical focus to COVID-19. Under some VBP arrangements, providers may be ineligible for any savings due to their inability to meet “quality gates” (i.e., certain quality metric thresholds that must be met before any savings payments are made) in the current climate. Cost savings targets are likely to be missed or at least distorted as providers focus on building out their capabilities to address the pandemic. How will these sudden and substantial changes affect the parties participating in value-based arrangements?

CMS has already announced that it will amend its quality reporting requirements from the fourth quarter of 2019 through the end of the second quarter of 2020.[1] The announcement covers a variety of quality reporting requirements and payment programs with the stated purpose of alleviating reporting requirements and disregarding unrepresentative data created during the emergency. CMS has also stated that it intends to prorate any losses incurred by Medicare accountable care organizations (“ACOs”) in 2020 for the duration of the public health emergency (e.g., if the public health emergency lasts for six months, the annual losses an ACO incurs in 2020 would be halved). Many – including a bipartisan group of Senators – have argued that this approach is insufficient to truly address the pandemic-related costs incurred by ACOs.[1] CMS has also stated that it will disregard all costs associated with care related to COVID-19 when performing benchmark calculations.[2] States may make similar changes for VBP arrangements in Medicaid programs. How these government steps would flow down into VBP agreements between managed care plans and providers is not clear and requires analysis of the specific agreements.

Imagine these scenarios:

• Your company cannot perform a contract because of the COVID-19 pandemic.
• A vendor informs you that she cannot provide your company with necessary goods because of supply chain issues caused by a governmental emergency declaration.
• A subcontractor cannot perform because its employees are self-quarantining.

These are not hypotheticals. Scenarios like these are playing out around the country. The real-world impact of the COVID-19 pandemic is colliding with contractual requirements, and there is new attention to the legal doctrines of “impossibility,” “frustration of purpose,” “impracticability, and “force majeure.”

What do they mean? In a nutshell, traditional contract law says that an unforeseeable event occurring after the contract was formed can excuse contract performance, and determining whether an event was unforeseeable will depend heavily on the specific facts and the language of the contract.