Assessing the financial health of some publicly traded health-care stocks is getting trickier.
A new rule enacted by the Financial Accounting Standards Board this year means that companies no longer need to include an estimate of uncollectible debt on their income statements as a deduction from gross revenue as well as a reduction to accounts receivable on the balance sheet.
The numbers can be substantial. For instance, physician-staffing firm Envision Healthcare EVHC 0.83% reported net revenue of $2.1 billion in the first quarter. A year ago, the group reported gross sales of about $2.9 billion, less a provision of $977 million for uncollectible debt, for net sales of about $1.9 billion.
Other companies, such as hospital operator HCA Healthcare, now report their valuation allowance in financial statement footnotes instead of on the actual statements.
The new accounting rule applies to all publicly traded companies in the U.S., but it is of particular importance to hospitals and companies that contract with them. That is because uncollectible debt is a fact of life for the industry. Uninsured or underinsured hospital or emergency room patients can face large bills for their services.
That business reality isn’t likely to change soon. Nearly 44% of people under 65 with private insurance had a high-deductible health plan in 2017, according to data from the Centers for Disease Control and Prevention. At the start of the decade, that figure was closer to 25%.
And while the change to accounting rules doesn’t impact what companies ultimately report as sales or cash flow, these valuation reserves have provided investors with useful information.
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Generally accepted accounting principles give companies wide discretion in estimating what share of bills they will be able to collect, since it is impossible to know when a customer will pay a bill until it happens. As such, a valuation allowance that grows more quickly than gross revenue might mean that a company‘s underlying sales are stronger than net revenue suggests. It also could mean that a vendor is expecting a weaker economic environment in the future.
On the other hand, a valuation allowance that grows more slowly than gross sales might mean that a company is using more aggressive estimates to meet earnings projections. Its sales growth might not be sustainable.
Those are important questions for an investor when deciding whether to own a stock. Now, investors will have a tougher time getting a straight answer.
Write to Charley Grant at charles.grant@wsj.com