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.