Moody’s: Tax Overhaul to Benefit For-Profit Hospitals

Steven Porter, February 16, 2018

Assessing the impact of the Tax Cuts and Jobs Act, the investors service picked winners from among for-profit hospitals, most of which stand to gain as their nonprofit competitors reckon with added financial pressures.

Eleven for-profit hospitals stand to save $700-800 million more this year collectively than they would have under previous tax rules, according to a Moody’s Investors Service report published Friday.

Although two of the 11 rated hospitals are projected to have a negative change in cash flow as a result of the tax law change, most are expected to benefit, and three are projected to see their cash flows increase 10% or more, thanks in large part to a lower corporate tax rate and greater potential for deductions.

Jessica Gladstone, a Moody’s senior vice president, said in a statement that HCA Healthcare and Universal Health Services are expected to reap the greatest benefits.

"For most others, the benefit will be more muted as limits on interest deductibility offset the lower tax rate,” Gladstone said. “Highly leveraged companies, such as CHS/Community Health and Quorum, may have to pay more in taxes. However, these companies will likely be able to utilize net-operating loss carryforwards in 2018, mitigating the cash impact."

The anticipated windfall at for-profit hospitals comes as nonprofit organizations reckon with the Tax Cuts and Jobs Act's impact on their operations.

Related: Nonprofits Don’t Know What’s Hit Them Yet

Related: About 16% of Nonprofit Hospital Orgs Face New Excise Tax on Exec Pay

Related: Bill Aims to Rescue Cost-Saving Tool for Nonprofit Hospitals

During an earnings call late last month, HCA Healthcare Chairman and CEO R. Milton Johnson said the company estimates its cash taxes were reduced about $500 million for the year as a result of the law.

“It is our plan to reinvest these expected savings into our markets and into workforce development,” Johnson said.

The tax law’s other big beneficiaries are likewise likely to find potential investments in capital projects and merger-and-acquisition activity to be more moderately more attractive, according to the Moody’s report.

“Operating hospitals is highly capital intensive with ongoing investment necessary to build replacement hospitals, invest in IT and clinical technologies and patient access points such as outpatient facilities,” the report states. “Without these investments, hospitals can often be competitively disadvantaged.”

The cash influx is projected to help mitigate industrywide headwinds, including Medicare and Medicaid reimbursement rates that fail to keep pace with rising costs. Nonprofits, however, which comprise the majority of U.S. hospitals, won’t receive the same boost.

“Not-for-profits will not be significantly affected by the tax law changes,” the report states. “This will likely give certain for-profit hospitals, like HCA, an edge in some markets where non-profit competitors won’t receive a similar cash benefit.”

The 11 hospitals included in the report are as follows: CHS/Community Health, Quorum, Select Medical, Acadia Health, Tenet Health, Prospect Medical, RegionalCare, Encompass Health, HCA Healthcare, Universal Health Services, and LifePoint Health.

Kindred Healthcare was excluded because it is being acquired and divided into two companies, according to a footnote. Ardent was excluded because its taxed are filed as a consolidated entity that Moody’s does not rate.

Steven Porter

Steven Porter is editor at HealthLeaders Media.

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