Borrowing costs could climb for hospitals in tax-exempt bond markets under one White House-backed proposal to help avoid the so-called fiscal cliff.
The proposal, one the president most recently included in his 2013 budget, would limit the tax exemption on municipal bonds for wealthy households.
Investors who buy tax-exempt bonds do not pay tax on the interest income, which is typically reflected in lower interest rates for borrowers. Healthcare and municipal bond finance officials say borrowers would pay investors more under the plan to offset the lost tax break, an increased expense for hospitals that could erode margins or raise hospital prices.
“If incentives to buy tax-exempt bonds are reduced or taken away, that will translate into higher borrowing costs,” said David Cyganowski, a managing director with healthcare financial advisers Kaufman Hall.
The cost of borrowing could climb further still, should anxious investors hedge against the risk that a new limit on municipal bond tax exemptions won't be the last time Congress scales back the tax break, said Matt Fabian, a managing director with Municipal Market Advisors. Bond prices would fall and interest rates would rise beyond what would be needed to offset the proposed limit.
Some investors may also leave the market, which could force borrowers to raise interest rates to attract buyers, he said.
The proposal comes as hospitals face possible cuts to revenue as the White House and Congress wrangle over a deficit fix to halt tax increases and spending cuts scheduled for next year.
The change would affect a major capital market for the majority of the nation's hospitals.
Not-for-profit hospitals and hospitals owned by state and local governments, which account for 80% of U.S. hospitals, rely on tax-exempt bonds to finance capital projects.
Capital spending by hospitals and health systems has slowed since the recession, but hospitals and other healthcare borrowers issued $29.6 billion in tax-exempt bonds this year, up nearly 30% from $22.8 billion the prior year, Thomson Reuters data show.
(Healthcare bond deals climbed sharply in 2008 to total $60.2 billion as hospitals scrambled to refinance debt as the nation's financial crisis erupted.)
The president's 2013 budget included a cap for wealthy households on tax exemptions and deductions. For couples with income of more than $250,000 and individuals with income of $200,000, tax breaks—including those for municipal bond interest—would be capped at the 28% tax rate.
Earlier this month, Gene Sperling, director of the National Economic Council, singled out the 2013 budget's call for a cap on tax expenditures in a speech in Washington, D.C., as one deficit measure for which the president has “shown willingness to support” and “has led on the issue,” according to the text of his remarks.