The Republicans’ tax overhaul plan, which is expected to become law soon, will cause many healthcare organizations to reassess their debt levels.
The tax bill will limit the tax deduction companies take for the interest they pay on their debt to 30 percent of earnings before interest, taxes, depreciation and amortization. This change will put pressure on healthcare companies with heavy debt loads. In 2022, interest expense deductions would be further reduced, which could cause companies’ tax bills to increase further, according to The Wall Street Journal.
Franklin, Tenn.-based Community Health Systems and Dallas-based Tenet Healthcare, which carry about $14 billion and $15 billion of debt, respectively, could be negatively affected by the tax bill’s limit on interest expense deductions. On Tuesday, Tenet said it expects the change to lower its 2018 earnings forecast, according to the report.
In a report issued earlier this month, Moody’s Investors Service said many speculative-grade companies across several sectors, including healthcare, would be negatively affected if deductibility were limited.
The Republicans’ tax overhaul plan, which is expected to become law soon, has negative credit implications for nonprofit hospitals and health systems, according to Moody’s Investors Service.
Here are three ways the tax bill will hurt nonprofit hospitals and health systems.
1. The tax bill will repeal the ACA’s individual insurance mandate. This will cause the uninsured population to rise and raise uncompensated care costs, which will negatively affect healthcare organizations’ operating margins and cash flow, according to Moody’s.
2. The tax plan’s limits on tax-exempt refundings is negative for all issuers of tax-exempt debt, including nonprofit hospitals and health systems, as these financings have been used to reduce long-term borrowing costs and take advantage of lower interest rates, according to Moody’s.
3. The tax bill will slash the corporate tax rate to 21 percent from 35 percent. This change has negative implications for nonprofit hospitals and health systems, as it “makes tax-exempt bonds a less attractive investment for banks and other financial institutions, which will weaken demand, especially for direct bank loans and private placements,” according to Moody’s.
Fitch Ratings’ outlook on the nonprofit healthcare sector is negative for 2018, as the sector faces regulatory, political and competitive challenges.
Here are four things to know about Fitch’s outlook on the sector.
1. Fitch expects nonprofit hospitals and health systems’ profitability to continue to weaken over the next year. “Growth in Medicare and Medicaid volumes are weakening provider payer mixes at a time when providers are moving from volume-based reimbursement in greater numbers,” said Fitch Senior Director Kevin Holloran.
2. Fitch said several factors could adversely affect lower-rated hospitals’ operating performance in 2018, including growing pressure on salaries and continued erosion in payer mix.
3. The proposed tax overhaul bill, which would hamper nonprofit hospitals’ ability to issue tax-exempt revenue, could further pressure the industry, according to Fitch.
4. Although the nonprofit healthcare sector outlook is negative, Fitch maintained its stable outlook for ratings of healthcare issuers. “Fitch anticipates our revised criteria for the acute care sector will be published early next year, which should lead to an above-average, but still balanced, degree of rating movement during the year,” the debt rating agency said.
House Republicans recently unveiled a tax reform plan that calls for the elimination of private activity bond issuance, which is likely to significantly impact the entire nonprofit hospital sector.
Nonprofit hospitals issue tax-exempt bonds to finance capital projects. Under the tax plan, interest on newly issued private activity bonds would no longer be tax-exempt. This change would reduce financing options for lower-rated healthcare organizations by raising the cost of capital, according to S&P Global Ratings.
“From a credit perspective, higher borrowing rates can lead to budget imbalances, a challenge for all, and a hallmark of struggling credits,” said S&P. “We believe operating margin pressure is likely to be exacerbated by the House tax proposal, as it will pressure costs and hurt margins for a considerable portion of our rated healthcare providers.”
The American Hospital Association also noted how the tax plan could negatively impact healthcare providers. “For many communities, tax-exempt financing, such as private activity bonds, has been a key to maintaining vital hospital services,” said Tom Nickels, executive vice president of the AHA. “If hospital access to tax-exempt financing is limited or eliminated, hospitals’ ability to make investments in new technologies and renovations in the future will be challenged.”
Senate Finance Committee Chair Orrin Hatch, R-Utah, released a draft of Senate Republicans’ tax plan on Thursday. Unlike the House tax proposal, the Senate’s tax plan would not eliminate hospitals’ ability to access low-cost capital financing through tax-exempt bonds.