Much of America is now entering the third week of social distancing, and with the President’s decision to extend Coronavirus mitigation guidelines through the end of April, businesses are bracing for continued interruption. Providers across the healthcare continuum – including pharmacies – have already begun to feel financial constraints, and ask, “What can be done?”
Fortunately, this week also heralded the passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), containing several financial tools for small businesses, and discussed in greater detail below. However, in addition to this landmark legislation, there are other opportunities for pharmacies to seek relief, including other financial products, revisiting contractual obligations (including within lease agreements and loan documents), key insurance coverage, and payor waivers. This article summarizes the relief tools available to pharmacies that have been negatively impacted by the Coronavirus pandemic, and guidance on how to take advantage of them.
CARES Act and Paycheck Protection Loans
The key aspect of the CARES Act applicable to healthcare businesses is the creation of the “Paycheck Protection Loan” program. This loan program is being offered to small businesses and 501(c)(3) nonprofits with fewer than 500 employees.
Such business can borrow the lesser of $10 million, or 2.5 times the average monthly payroll costs – including wages for employees (capped at $100,000 per year), as well as expenses for paid sick leave, healthcare and other benefits – during the previous 1-year period. Interest rates are capped at 4% and the loan term may be up to 10 years. Payments may be deferred for up to a year, and portions of the loan amount may be forgiven (if it is spent within the first eight weeks on operating expenses—the guidance has not been released as of the drafting of this article).
However, the proceeds from these loans may only be used for qualifying payments aimed at keeping people employed, including payroll support, utilities, rent, and payment of pre-COVID debt obligations. Because of this, it is recommended that pharmacies work with experienced counsel in seeking and utilizing these funds, to ensure compliance and the maximum benefit.
SBA Economic Injury Disaster Loans
In addition to the recently-created Paycheck Protection Loans, the Small Business Administration’s (“SBA”) Economic Injury Disaster Loans (“EIDLs”) have been around for some time, and provide protection in the event of a disaster. While this is the first time a virus or pandemic event has been defined as a disaster, businesses are now eligible to apply for EIDLs in connection with the coronavirus outbreak.
Offered through the SBA, EIDLs may be issued for up to $2 million, with a repayment period of 30 years. In addition, the initial payments are typically deferred for a full year from the date of the note.
There are many decisions that factor into whether to seek funding under a Paycheck Protection Loan or an EIDL, not the least of which is how the funds may be used.
Abatement from Contracts and the “Force Majeure” Clause
Another critical concept pharmacies must consider when suffering financially due to the coronavirus outbreak is the concept of “force majeure.” A force majeure clause typically excuses performance by a party when an event occurs that is outside of the party’s reasonable control, including “Acts of God.” These clauses may allow pharmacies to get out of performing on certain contracts, such as lease agreements or recently signed contracts.
For example, if a pharmacy recently entered into a new software agreement premised on its expansion into a new line of business, and those goals have been completely dashed by the coronavirus pandemic, a pharmacy may be able to back out of the agreement based on a force majeure provision.
Likewise, tenants may be able to utilize force majeure protections if they are unable to perform material or time-sensitive obligations, such as the obligation of a tenant to continuously operate its business from its premises. While force majeure provisions rarely extend to purely monetary obligations within lease agreements, such as a tenant’s obligation to timely pay rent, they may nonetheless provide a stepping stone from which to engage in broader negotiation about the underlying agreement terms in these particularly uncertain times.
The language of force majeure provisions can vary greatly, and some are written better than others. Thus, it is critically important that pharmacies work with experienced counsel quickly to review these contract provisions and determine available rights and obligations.
Forbearance, Deferral and Modification Agreements
In addition to relief from certain contractual obligations, negatively impacted pharmacies may also be able to seek relief from existing debt obligations, such as mortgages or business loans. With the Federal Reserve lowering interest rates to practically nothing, many banks have become increasingly willing to work with borrowers to either put off loan payments for a period of time, or completely restructure underlying loan arrangements. This might include simple payment deferrals, extended terms, or modified loan structures. In any case, Frier Levitt regularly works with pharmacies and businesses in negotiating and restructuring loan agreements.
Business Interruption Coverage
As social distancing guidelines cause drops in medical office visits, many pharmacies have experienced reduced prescription volumes. Likewise, many pharmacies have questioned whether “business interruption” or “business extra expense” coverage extensions may apply to provide some relief for the lost revenues. While many “business interruption” policies typically require some form of “physical” damage to property in order for coverage to kick in, the law continues to change every day (for example, the New Jersey Legislature recently introduced a Bill that would require coronavirus related loses to be included within business interruption coverage). There have been at least four lawsuit that have been filed across the country seeking declaratory judgment that coverage is triggered due to Coronavirus, and arguing that the coronavirus contamination is “actual physical loss” or “physical damage” to property. In any event, while these cases play out, because of notice of loss requirements, it is critical that pharmacies speak with experience counsel to review their insurance coverages and preserve their rights.
Payor Waivers
Finally, separate and apart from any specific form of relief, pharmacies also have several opportunities to actually expand and adapt their services through changes in payor programs. For example, CMS has put out guidance to Part D plans encouraging them to waive certain mail order limitations, prior authorization requirements or refill restrictions. While some PBMs have voluntarily implemented certain waivers, others have lagged behind, and there is still a great deal of opportunity to pharmacies to seek waivers and expand their footprints. This could include the ability to mail to patients, the ability to fill at greater days supply, or a removal of the requirement to collect a patient signature. Frier Levitt is actively assisting pharmacies in obtaining waivers from PBMs and other payors to expand their operations and continue to service patients during these complex times.
DIR Fees
During this period of reduced pharmacy revenue and margins, Direct and Indirect Remuneration (“DIR”) fees, which have always been substantially problematic, may now be untenable. Pharmacies should not allow PBMs to siphon 4% or more of hard-earned revenue earned protecting the American public. Pharmacies may need to challenge DIR fees in order to preserve their viability and to continue to serve the nation’s patient population. Pharmacies have substantial federal, state and contractual rights to fight DIR fees. Now may be the time to begin fighting DIR fees with Frier Levitt accepting creative fee arrangements that take into account the financial crisis.
How Frier Levitt Can Help
This pandemic has impacted stakeholders in the healthcare and life sciences sectors differently. Frier Levitt remains extremely well positioned to assist our healthcare and life sciences clients in these unfamiliar times. And because of our representation of hundreds of pharmacies across the country, we are often able to perform many of these services on alternative fee arrangements, where we ensure that legal fees align with value delivered. We encourage you to contact us to learn about ways we can help. Above all else, stay safe and healthy.
