For American hospitals, financial strength separates tax-reform winners from losers

Cash flow at each of the two companies should rise 10 percent or more under the new law, which lowered the top corporate tax rate to 21 percent from 35 percent while trimming popular deductions including interest paid on loans. While the majority of the 11 for-profit chains analyzed will benefit, most will receive cash flow boosts of just 4 percent or less, Moody’s projected in a new report.

Companies with higher credit ratings “are benefitting more,” Jessica Gladstone, a Moody’s senior vice president and the report’s lead author, told the Washington Examiner. “They don’t take the hit from less interest deductibility.”

Congress’s decision to cap deductible interest expenses at about 30 percent of income is one of the tradeoffs intended to curb the law’s impact on the swelling U.S. deficit as its backers wait for the economic growth they and President Trump say the bill will generate. In the interim, the law is expected to widen the country’s deficit by about $1.5 trillion.

While its lower tax rate is welcome news for hospitals grappling with rising salaries for nurses and doctors even as growth slows in the number of patients seeking treatment, changes to the interest rate deduction will pinch Community Health System Inc. and Quorum Health Corporation hard, Moody’s noted.

Both have ratings well below investment grade and high debt burdens – 11 percent or more of adjusted earnings – which increases the risk that at least some of their interest payments won’t be deductible.

Given hospitals’ generally high leverage relative to other industries, however, it’s somewhat surprising that the interest rate change isn’t having a deeper impact, Gladstone said.

Instead, even those companies that are hurt will be able to make up for at least some of the extra expense using credits from operating losses in previous years or taking advantage of a change that allows immediate deduction of capital investments.

“Hospitals are a very capital-intensive industry,” Gladstone said, and “2018 is going to be a big capital-expenditures year for a bunch of companies, so that’s another reason we think that even for highly-levered companies, taxes probably won’t go up.”

Indeed, Nashville, Tenn.-based HCA expects its tax bill to drop by $500 million as its effective rate slides to 25 percent from an average of more than 30 percent over the past six years.

“We don’t see any phaseout of the interest deductibility of any material nature” during the next five years, Chief Financial Officer Bill Rutherford said in late January, when HCA started a dividend of 35 cents a share.

The company also boosted its three-year capital-spending plan by about 28 percent to $10.5 billion, and CEO Milton Johnson said most of the tax savings would be channeled into expansion, improvement of the company’s medical facilities and technological upgrades.

“We operate in really very good markets for healthcare, where you see population growth, aging of the population, increase in chronic conditions,” he said. “With the capacity constraints that we see in our markets, to continue to grow organically, we have to invest. And I think we will drive very good returns off of those investments in the markets we’re in.”

While such strategies are good for creditors, Moody’s noted, hospitals will also be returning some of their savings to shareholders through stock buybacks and dividends such as HCA’s payout, valued at about $500 million.

Universal Health, headquartered in King of Prussia, Pa., already pays a quarterly dividend of 10 cents a share and may increase it, Moody’s projected.

Other firms, such as Dallas-based Tenet Health, have already begun working to pay down comparatively high debt, and the tax law change will make that goal even more urgent, Moody’s said.

“In 2019 or beyond, depending on the company, even though they’re OK in 2018, this becomes more negative for the highly-levered companies,” Gladstone said.