Dive Brief:
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A new report from Moody’s Investors Service said the recent tax overall and $1.5 trillion tax cut will boost cash flow to for-profit hospitals and help offset industry headwinds. The lower corporate tax rate and increased ability to deduct capital expenses will also help those hospitals.
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HCA Healthcare and Universal Health Services (UHS) will benefit the most from the change, while others won’t benefit as much because of limitations on interest deductibility.
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Moody’s said nine of the 11 for-profit hospitals it analyzed will have lower taxes in 2018. Community Health Systems (CHS) and Quorum may pay more in taxes, which will affect already limited cash flow.
Dive Insight:
The tax reform package will help most for-profit hospitals faced with “lackluster” patient volume growth, reimbursement risk and costs connected to compensation and benefits. Reduced taxes for systems like HCA and UHS will give them an edge against nonprofit competitors that won’t benefit as much from the lower taxes, Moody’s said.
Net aggregate tax savings for the rated for-profit hospitals will be between $700 million and $800 million more in 2018 compared to what would have been paid under the previous rules.
Moody’s expects those companies will invest in ways to attract and retain employees and improve patient volumes. HCA will save about $500 million in taxes in 2018 and Moody’s expects the system will invest about $300 million on workplace development initiatives, such as education programs, tuition reimbursement and expanded family leave. Also, investments in clinical technologies and adding outpatient facilities will help HCA increase patient volumes, according to the report.
“In an environment of continued nursing shortages and a tightening labor market, we believe that these initiatives will help the company attract and retain talent, particularly as HCA generally operates hospitals in highly-competitive urban and suburban markets,” Moody’s said.
Heading into 2018, HCA already beat market expectations in Q4 2017. The system reported $11.56 billion in revenue, which was an 8.6% increase over the previous year. HCA also saw inpatient revenue per admission increase 3.6% in 2017.
However, it’s not all good news for other for-profits. Health systems won’t be able to deduct as much interest expense, which will make repaying debt a higher priority. The new tax law will spark highly-levered companies, such as Quorum, Tenet Healthcare and CHS to repay debt. That may accelerate the sale of some hospitals.
“Unlike the higher rated for-profit hospital companies, these highly-levered companies will not receive any competitive boost from the change in tax law. They may even be disadvantaged by it. Even a relatively small increase in cash taxes could consume a meaningful portion of already thin cash flow — potentially reducing companies’ ability to reinvest and compete in some highly competitive markets,” Moody’s said.
Overall, the tax law is expected to help for-profits, including when it comes to their nonprofit hospital competitors, which make up most hospitals. Moody’s expects nonprofits won’t gain the same benefits as for-profits in the tax law. This will give for-profits a further advantage against their nonprofit competitors, who are already struggling to improve margins.
Nonprofits are figuring out whether the tax bill may actually hurt them. They may wind up paying higher taxes on employees making more than $1 million. The tax rate depends on how the nonprofits are structured.
Beyond the tax benefits gained by for-profits in the new law, another concern for nonprofits that for-profits don’t have to think about is that nonprofits must prove a community benefit to maintain their tax-exempt status. The American Hospital Association recently released an analysis that said hospital community initiatives outweighed the value of tax exemption 11:1. However, critics are still concerned about high salaries and nonprofits doing well on Wall Street and complain that community benefit rules can allow promotional events being considered a benefit.