Tax law a boon to some for-profit chains, a drag on others

The new tax law could widen the distance between healthcare’s haves and have-nots. It’ll be a boon to the balance sheets of for-profit health systems that are faring well, giving them more resources. But it could make life more difficult for their cash-strapped peers in 2018 and beyond.

“It increasingly bifurcates the winners and the losers in the for-profit hospital industry,” Jessica Gladstone, a senior vice president with Moody’s Investors Service, said of the Tax Cuts and Jobs Act, which was enacted in late December.

Large for-profit hospital chains that have thrived in recent years, such as HCA, Universal Health Services and LifePoint Health, highlighted huge expected tax breaks on investor calls in recent weeks. Nashville-based HCA, which posted more than $2 billion in net income on nearly $44 billion in revenue last year, expects to pay $500 million less in cash taxes under the law’s lower corporate tax rate beginning in 2018.

But healthcare companies carrying high debt loads like Community Health Systems and Tenet Healthcare Corp. aren’t as vocal about the tax law’s effects. These companies, while sharing in the benefits of a lower tax rate and ability to immediately deduct capital expenses, are now limited in how much interest they can deduct.

Moody’s studied 11 for-profit health systems and determined they would see $700 million to $800 million in tax savings in 2018 compared with what they would have paid under previous rules. The vast majority of the savings will go to HCA and UHS.

Gladstone, an author of the Moody’s report, said health systems that are doing well will reinvest in their markets to become even more competitive, add- ing, “whereas the companies that have already been struggling with investments like Community or Quorum are probably going to be doubly at a disadvantage because they’ll have less free cash flow to invest in their markets.”

CHS reported other financial setbacks last week, primarily that it was recording a $2 billion fourth-quarter net loss, mostly from nearly $1.8 billion in impairments and reduced assets related to the company’s hospitals, including those it sold or plans to sell. The Franklin, Tenn.-based chain also reported a roughly $400 million increase in its provision for bad debt and

an increase of about $200 million in contractual allowances, both of which it said are due to switching to a new Financial Accounting Standards Board principle that narrows what hospitals can categorize as revenue.

But Universal Health’s outlook is stronger. The King of Prussia, Pa.based company whose net income increased to $752 million on more than $10 billion in net revenue last year, expects to save up to $150 million in cash taxes this year.

Steve Filton, the company’s chief financial officer, expects UHS could save an additional $50 million under the provision of the law that allows for accelerated depreciation, which could prompt more capital expenditures. UHS projects a capital budget of up to $625 million.

“We feel like there are some projects and opportunities we think are compelling today that we didn’t necessarily think were compelling two months ago,” Filton said.

The new law limits the amount of interest expense companies can deduct to 30% of their earnings before interest, taxes, depreciation and amortization through 2021.

But since companies that have generated losses in the past can still use those to shield income from taxes in future years, a function called net operating loss carryforwards, companies that are hit by the new deductibility cap can still offset their tax burdens in future years.

Dallas-based Tenet expects 80% of its capital expenditures will qualify for immediate deduction in 2018.