February 21, 2018 - The tax cut legislation signed into law late last year will help most for-profit hospitals in 2018, boosting their bottom lines at a time when several major chains are struggling with weak admissions and making acquisitions and capital investments more attractive.

Moody's Investors Service said taxes will be lower in 2018 for nine of the 11 companies it analyzed. HCA and Universal Health Services will be the biggest beneficiaries both on an absolute basis and relative to their current cash flow, making up the "vast majority" of the $700 million to $800 million in aggregate tax savings among the analyzed companies.

"Reduced cash tax payments will help beneficiary hospitals offset a number of headwinds that will continue to challenge the industry over the next 12 to 18 months," the Moody's report said. "One of the most pressing is rising wage inflation. Salaries, wages and benefits are hospitals' biggest operating expense, typically amounting to 40 percent to 50 percent of net operating revenue. Other headwinds include Medicare and Medicaid reimbursement increases that do not keep up with inflation and weak inpatient volume trends."

In the case of HCA, Moody's expects it will reinvest the tax savings into workforce incentive programs like tuition reimbursement as well as a $500 million boost in its capital expenditures in 2018.

Other companies, like LifePoint Health and Ecompass, will "benefit meaningfully" from the tax cuts, though to a lesser degree. Five others (Select Medical, Acadia Health, Tenet Healthcare, Prospect Medical and RegionalCare) will see only "muted" benefits thanks to limitations on deductions for interest expenses offsetting the tax cuts.

For Community Health Systems and Quorum, the legislation may actually increase their tax bills because both are already highly leveraged. For at least 2018, however, any tax increase "will likely be offset" by their use of income tax net operating loss carryforwards. Any savings for these companies would likely be put towards repaying debt rather than returns for shareholders or making investments in existing or new facilities.

For several of the systems, however, capital expenditures, as well as mergers and acquisitions (M&A) activity may become "moderately more attractive." As part of the tax law, companies will be able to fully deduct the cost of new assets and used property, plant and equipment (PP&E).

"For example, if structured as an asset purchase, a significant portion of the cost of acquiring a hospital could be deductible for tax purposes in year one of an acquisition, reducing cash taxes. This could help sellers of hospitals, including Quorum, Tenet, Community, which are actively looking to divest hospitals. The change in tax law could make their assets marginally more attractive to potential buyers," the report said.

The report predicted the tax law won't be the major driver of M&A activity, however, as "local market strategies and potential for synergies" will still drive those decisions. Additionally, since most buyers in recent deals have been nonprofit hospitals that wouldn't benefit from the tax bill, they wouldn't have the same motivation to change acquisition strategies.

By: John Gregory
Posted on HealthExec