番茄社区

As many Americans prepare their income taxes before this year's extended deadline, at least one large hospital system apparently does not intend to pay the millions of dollars it owes to the federal government any time soon.

Tenet Healthcare indefinitely deferred its 2019 payment of $134 million, and its 2018 balance of $159 million, as allowed under the 2017 federal tax reform legislation. It's also holding on to $91 million from a new interest expense deduction benefit, per the CARES Act.

On top of that, Tenet has been infused with cash via the CARES Act, including more than $1 billion in stimulus funds, a $1.5-billion Medicare advance and about $67 million returned from Medicare, $60 million in Medicaid grants, and $250 million in this year's Social Security payroll tax match that it has also deferred paying for 18 to 30 months.

Yet in April, the company furloughed more than 10% of its workforce and suspended a retirement benefit for its employees.

Experts have questioned whether Tenet and other companies that receive vast amounts of federal assistance -- and that are already sitting on cash reserves -- really need to be cutting employees at all.

"Why are these large systems that have reserves -- which are supposed to get you through down periods -- why were they able to both collect federal fund sources and at the same time furlough and lay off employees?" said Allan Baumgarten, JD, an independent health market analyst and researcher.

番茄社区 analyzed records from the project, produced by Good Jobs First, as well as the company's financial statements and other analyst reports, to better understand how one of America's largest healthcare systems is trying to handle its finances during strain brought on by the pandemic.

Tenet declined to make executives available to comment for this story. In an emailed statement, the company said it needs the federal funds to continue all of its operations.

Tax Advantages

Tenet Healthcare is one of the largest American hospital systems, operating 65 hospitals, 24 surgical hospitals, and nearly 500 outpatient centers.

Last year, the Dallas-based for-profit public company earned $18.5 billion in revenue, and as of June 15, its cash reserves totaled $2.67 billion. It sits among the top 200 of the Fortune 500 list and employs 113,000 people.

Tenet has been in a "financial turnaround situation for the last four years, forced by activist investors," according to health industry analyst Jeff Goldsmith, of the consultancy .

"Long before this [COVID-19] crisis, Tenet's management was under tremendous pressure to improve their performance," Goldsmith told 番茄社区.

Indeed, investors with , once Tenet's largest shareholder, forced the company to eventually turn over 70% of its board and replace a few executives in the last few years.

Former board chairman took over as CEO and initiated a strategy to cut costs. Tenet sold multiple hospitals in markets such as Dallas and Chicago. It also sold its two remaining Philadelphia hospitals, including Hahnemann University, which closed less than 2 years later.

Last year, Tenet cut $300 million in expenses "via centralization, overhead reductions, off-shoring, [and] external spend management," and refinanced $5.7 billion of debt, Rittenmeyer . Tenet also anticipates for selling its two Memphis-area hospitals and related facilities, and plans to spin off its revenue cycle unit, , this year.

"When you are in a for-profit hospital system, you have to earn for your investors," said Robert Bonar, director of George Washington University's health administration program.

In addition to those cuts, Tenet has leveraged the that enable companies to defer payments and reduce their tax burden.

Many companies, including Tenet, delayed paying their 2017 tax liabilities at the rate then (35%) to follow whatever the rate is when they decide to pay (21% for 2019), said Matthew Gardner, a senior fellow with the Institute on Taxation and Economic Policy, a liberal think tank.

"That's certainly an incentive created by the tax cut," Gardner told 番茄社区. "No question companies have a lot of discretion on a large chunk of their income. Companies have a lot of latitude in choosing when to execute tax breaks."

On paper, Tenet eventually will have to pay what it owes, but in the meantime it carries a rolling tax liability tab across financial quarters. Tenet owed the government $683 million at the start of 2017, for example, but reduced that tally to $411 million by the end of the year.

"There's no indication whatsoever that there is anything illegal going on here," said Gardner, two reports on corporate tax deferment, featuring Tenet. Still, companies "know full well they may never pay the full amount."

"These tax breaks tend to roll forward indefinitely," he said. "There are a lot of things that could happen that make 'eventually' never come."

It is unclear how much of its tax debt Tenet has paid down each year or quarter. While it declined by $272 million in 2017, for example, Gardner said that could be due to Tenet making payments -- as well as to the reduced rate knocking off millions from its tab, or other factors.

"All we know is what happens to the deferred liabilities, the size of the IOUs," Gardner said, because the SEC mandates companies report that. "They just don't have to tell us" how much of their liability they actually pay -- versus how much is otherwise erased.

"There's no question if our corporate income tax is leaking like a sieve right now, in free fall revenue-wise, these tax breaks are a main reason why," he added.

Wrote the Tenet spokesperson: "We are a tax-paying entity, continuing to contribute resources into the communities in which we operate." She did not elaborate on those resources and company reports did not reveal them.

Reserves and Need

Tenet reported in the first quarter this year, driven in part by "a favorable income tax benefit [the $91 million interest expense deduction]," according to its ; the profit was "partially offset by the effects of COVID-19."

Like health systems worldwide, Tenet's revenues and operational volume took a nosedive early in the pandemic, with admissions declining 33% in April over last year and ambulatory surgery volumes falling 80%, .

The problem is industry-wide. Hospital revenues were in March alone, according to the consulting group . The American Hospital Association (AHA) in June at least $323 billion in revenues this year, due to declining elective volumes and more expensive COVID-19 care -- including acquiring more PPE.

As of late June, hospitals have received $54.6 billion of the $102.6 billion disbursed via the CARES Act, according to the AHA. "Though significant, this amount represents just a fraction of the total financial losses already experienced by hospitals," according to the AHA report. "More financial support is urgently needed."

Regulators were "definitely" concerned about hospitals' financial health in the midst of the pandemic, Julie Utterback, CFA, who authored the Morningstar report on Tenet, told 番茄社区.

"I do think it's fair to presume many hospitals will lose money this year," she said. "There's a reason why the government has been so generous to the industry."

Tenet's share of CARES Act funds, as of July 9, was $1.42 billion in grants and loans received since April -- including $801 million loaned and $621 million in grants.

"We are grateful for the federal assistance we have received, which has helped offset some, but not all, of the impact of the pandemic and enabled us to direct important resources to areas most in need," the Tenet spokesperson wrote.

In early April, Tenet furloughed 500 non-clinical employees and suspended employer 401(k) fund matching. Two weeks later it announced it was furloughing 10% of staff, including healthcare workers involved in elective care.

The pandemic "greatly reduced demand for services," the spokesperson said. "That required us to flex our staff and even selectively engage in furloughs ... which did not impact any caregivers related to COVID care, and also helped to protect this staff from unnecessary exposures in the hospital setting."

Other hospital systems also reduced staff during the pandemic, including some non-profit systems that also "sit on significant capital reserves," Baumgarten said.

"It's not limited to Tenet," he said. "All of them followed the same formula."

But: "I think it's disappointing," he added. "Federal funding was intended to keep people on the payroll. I don't know that they're breaking any rules, but I think the expectations of Congress was to be something of a bridge ... so hospitals could keep employees on the payroll."

Why not tap into reserves? Theoretically, the stockpile is meant for a situation such as the pandemic, experts said.

But tapping into reserves erodes their credit ratings. "That's what every hospital, even non-profits, are concerned about" because it hinders their ability to borrow and stains a CEO's reputation, Bonar said.

"No CEO wants to get downgraded during their tenure," he said.

All companies with large reserves think about what they would need to survive 100 years, Goldsmith noted. "There could be another [pandemic] in two years" and the federal government may not be issuing stimulus funds then.

Plus, said Utterback, Tenet's reserves include mostly money that it must pay back; the more descriptive term is "cash-on-hand." That figure soared from $200 million at the end of last year to $2.67 billion in June in part because of active borrowing.

Uncertainties and Future Challenges

After states reopened, Tenet's business has rebounded. Admission and hospital surgery volumes in May were back to 80% of pre-pandemic levels, Tenet reported, with those percentages increasing over the first half of June. It still has the cash-on-hand plus an untapped $1.9-billion credit line.

But Tenet lost $243 million last year and ended 2019 $14.8 billion in debt, according to the Morningstar report. It is also due to reimburse Medicare the $1.5 billion by April.

"We will have to start to repay a large portion of the federal aid beginning in August, a time likely before the current COVID care needs are alleviated," the Tenet spokesperson wrote.

The amount that systems such as Tenet lost in revenue due to the pandemic "far exceeds" what they received from the government, Goldsmith said.

While that is the same for nearly all U.S. hospital systems, other issues could be poised to affect Tenet specifically. Its three largest state markets are California, Florida, and Texas, where coronavirus cases and hospitalizations are surging. Texas recently banned elective surgeries in some counties again; the state accounts for of Tenet's beds, according to Utterback and .

Utterback rated Tenet as having "extreme" uncertainty and no economic moat in the Morningstar analysis.

"With the COVID-19 crisis in full swing, an economic downturn in the works, and a U.S. healthcare policy change possible, we see a reasonable scenario where Tenet may have to fight for its survival in the next five years because of its albatross of a debt position," according to the analysis.

But that is just one possible scenario. In an email to 番茄社区, Utterback noted that Tenet "appears to be working towards steady growth and improved profit generation that we think will eventually result in significant cash inflows for U.S. taxing entities. With the uncertainty surrounding COVID, though, that outcome appears delayed, but we do not think it has been canceled quite yet."

Tenet's survival depends greatly on fee-for-service remaining a dominant pay model, Baumgarten said, much like many large provider systems. Tenet is building new centers primarily not in areas of need -- but where more people have employer-based insurance plans and above-average household income. "Tenet is one of those hospital systems that is very much wedded to the fee-for-service model, so the question is, 'Is that sustainable long term?'"

In the meantime, experts predict Tenet will further cut labor and other expenses this year and in 2021 -- even if the U.S. economy bounces back soon.

How would that affect their tax payments?

That is one of a few questions that Bonar, who served as CEO of two non-profit systems for more than a decade until his 2017 retirement, chewed on regarding for-profit hospital systems such as Tenet.

While non-profit hospital systems must prove they are providing community benefits to keep their tax-exempt status, Bonar said, for-profit systems' burden "is paying taxes on their earnings."

"There is a sense in my conscience that something doesn't sound fair," he said of Tenet's tax deferments.

But Bonar deflected blame towards the system. "So then you have to go back to the government and say, 'What are you guys doing? Is that what you intended to do?'"

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