An appellate court ruled on Monday that lower courts cannot stop the Small Business Administration from excluding hospitals in bankruptcy proceedings from forgivable COVID-19 relief loans.

Hidalgo County Emergency Service Foundation, an ambulance service in Texas, sued the Small Business Administration because it was denied a Paycheck Protection Program loan because it is in Chapter 11 bankruptcy proceedings. SBA rules state that companies that are debtors in bankruptcy proceedings aren’t eligible for PPP loans.

A bankruptcy court originally sided with Hidalgo and placed a preliminary injunction on the SBA prohibiting it from considering bankruptcy status in Hidalgo’s application, but a three-judge panel of the 5th U.S. Circuit Court of Appeals ruled that the court didn’t have authority to enjoin the SBA.

Some small hospitals in bankruptcy proceedings have also sued to get access to PPP loans.

PPP loans are only available to businesses with 500 employees or fewer. The Small Business Administration allowed community-owned rural hospitals to begin receiving the loans in April.

House Democrats’ opening bid for Congress’ next COVID-19 relief package includes language that would make critical-access hospitals eligible for PPP loans regardless of bankruptcy status.

American Hospital Association executive vice president Tom Nickels in May wrote to a lawmaker in support of the bankruptcy provision in the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act.

An AHA spokesperson said the group does not have an estimate of how many of its members the HEROES Act provision may benefit.

However, a consultant who works with hospitals on mergers and acquisitions said more hospitals could find themselves in bankruptcy proceedings once recoupment begins for Medicare accelerated and advance payments in the fall. If hospitals don’t pay back the loans, CMS cuts off Medicare fee-for-service revenue and counts claims toward the loan amount.

Hospitals have lobbied for tweaks to the Medicare accelerated payment program, claiming that the recoupment could decrease hospitals’ revenue by 25%. The financial stress of the recoupment would vary from facility to facility, and depend on whether hospitals actually ended up spending the loan money.

The HEROES Act would make changes so providers would have one year before they had to begin repaying the loans instead of 120 days, recoupment would be limited to 25% of Medicare claims, and the full repayment deadline would be extended to two years after the payment is issued. After that deadline, the payments would begin accruing interest at a 1% rate, compared with the current interest rate above 9%.

The HEROES Act has been panned by Senate Republicans, and it’s unclear what provisions could make it into a compromise package.

Alex Kacik contributed reporting to this article.

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