What is a hospital bond
A hospital bond is a type of municipal bond intended to support the construction of new hospitals, nursing homes or related facilities. The bonds can also be used to purchase new equipment for these facilities or to finance upgrades to existing hospitals. Revenues generated by hospitals are then used to reimburse bondholders. Generally, bondholders do not receive payment until after they have paid the hospital management fees. This second layer payment can create a risk for bondholders if the hospital is not as profitable as expected.
DISTRIBUTION OF GUARANTEE ON HOSPITAL REVENUES
Hospital income bonds are considered to be one of the riskiest types of municipal bonds. As their name suggests, income bonds are generally supported by the income that the specific project can generate. If these revenues are insufficient, municipalities are under no obligation to use other funds to reimburse bondholders.
And unlike cities, hospitals cannot tax residents to cover expenses or pay down debt. This inability to increase income through taxes means that hospital income bonds generally offer higher returns. The high yield is due to a higher risk of default than a general bond.
The rating companies assess an issue of income bonds and assign a classification indicating the probability that the bond will be redeemed on time. Hospital income bonds that depend on government funded programs such as Medicaid and Medicare are a higher risk investment. The uncertainty surrounding possible changes to the healthcare market and insurance laws creates an unpredictable environment for hospitals and the bonds used to support them. However, when there is a decline in supply in the municipal bond market, investors are more likely to consider hospital bonds that pose higher risk.
Tax considerations for hospital income obligations
Income from a hospital income guarantee may be exempt from state, local and federal taxes. However, this varies depending on the location and the impact of current tax legislation, which is subject to change. A tax plan introduced by Congress in 2020 initially included an amendment that would prevent hospitals from issuing tax-exempt bonds. The plan has prompted many hospitals to rush to seek funding before the proposed legislation can come into force.
Several large hospital groups strongly opposed the proposed change, warning that eliminating the tax break would increase borrowing costs. The increased costs would in turn limit or reduce their ability to expand, renovate or build new facilities. Ultimately, communities and their residents would suffer the most damage. The final tax plan abandoned the proposed legislation.