Most for-profit hospitals stand to gain from the changes to the U.S. tax laws, according to a new Moody’s Investors Service report. But HCA Healthcare and Universal Health Services will be the biggest beneficiaries and could see their operating cash flows go up by 10% or more.
A lower corporate tax rate and increased ability to deduct capital expenditures under the Tax Cuts and Jobs Act will boost cash flows for all but the most highly leveraged companies, whose taxes may go up under the new legislation, Moody’s said.
Indeed, of the 11 U.S. for-profit hospitals that Moody’s analyzed for the report, nine of them will see lower taxes in 2018. Moody’s made that determination by estimating net aggregate tax savings for the 11 rated for-profit hospitals of between $700 million to $800 million in 2018 versus what they would have paid under previous tax rules.
CHS/Community Health and Quorum will likely not benefit from the change. These highly leveraged companies may have to pay more in taxes under the new legislation given their very high level of interest expense relative to EBITDA, according to the report. However, these companies will likely be able to use net operating loss carryforwards in 2018, mitigating the cash impact, Jessica Gladstone, senior vice president at Moody's, said in an announcement.
HCA Healthcare and Universal Health Services, along with LifePoint Health and some for-profit hospitals, will find the lower tax rate will help offset lackluster patient volume growth, reimbursement risk and rising costs associated with nursing and physician compensation and benefits. Gladstone predicts that HCA, Universal Health and LifePoint could all see operating cash flow go up by 10% or more in 2018 under the tax code changes.
The report also finds that for many highly leveraged for-profit hospitals, debt repayment will become a more attractive use of capital, given the new limits on interest deductibility. Select Medical and Acadia Health, for example, both have these limits but also generate excess cash flow that could be used to pay down debt. And for companies already pursuing debt-reduction strategies, such as CHS/Community, Quorum and Tenet Healthcare, the tax law changes lend more urgency to debt repayment.
For companies whose taxes will be reduced, creditors will benefit from hospital companies that use their tax savings to invest in their markets to drive growth. However, creditors won’t get the full benefit. At least some of the tax savings are likely to go to shareholders in the form of share buybacks or dividends, according to the report. For example, the report notes that HCA has initiated a first-time shareholder dividend of about $500 million annually. Universal Health already pays a common dividend and may look to increase the amount.
Not-for-profit hospitals will not see significant changes as the result of the new tax law, according to Moody’s. As a result, certain for-profit hospitals, like HCA, will have an edge in some markets where nonprofit competitors won’t receive a similar cash benefit.