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Moody's expects for-profit hospitals to benefit from US tax reform

Moody's believes a majority of for-profit hospitals can expect to benefit from changes in the new U.S. tax law.

A lower corporate tax rate and increased ability to deduct capital expenditures under the law will increase cash flows for all companies expect ones that are highly leveraged, which might see a rise in their taxes.

In a report, the rating agency found out that taxes in 2018 will be lower for 9 out of the 11 for-profit hospitals in the U.S.

Jessica Gladstone, Moody's senior vice president, said HCA Healthcare Inc. and Universal Health Services Inc. will be the "biggest beneficiaries," on an absolute basis, from the changes in the U.S. tax law, while benefits will be more "muted" for most other for-profit hospitals since limits on interest deductibility offset the lower tax rate.

Gladstone added that highly leveraged companies, such as Community Health Systems Inc. and Quorum Health Corp., may have to pay more in taxes, but they will likely be able to utilize net-operating-loss carryforwards in 2018, alleviating the cash impact.

In addition, for some hospitals, including HCA Healthcare, Universal Health Services and LifePoint Health Inc., a lower tax rate will help offset industrywide headwinds, such as lackluster growth in patient volume, reimbursement risk, or rising costs linked to nursing and physician compensation and benefits.

This could give these for-profit hospitals an advantage over their not-for-profit competitors in some markets, according to Gladstone. She said these factors could result in an operating cash flow increase by 10% or more for HCA, Universal Health and LifePoint under the tax code changes.

For many highly leveraged hospitals, debt repayment will become a more attractive use of capital, given the new limits on interest deductibility. Select Medical Holdings Corp. and Acadia Healthcare Co. Inc. have these limits but also generate excess cash flow that could be used to pay down debt.

On the other hand, for companies already pursuing debt-reduction strategies, such as Community Health, Quorum and Tenet Healthcare Corp., the tax law changes lend more urgency to debt repayment.