A hospital revenue bond is a type of municipal bond that finances the construction of new facilities or upgrades for existing hospitals, and is secured by the revenues that hospitals receive in the course of their normal operations.
Key Takeaways
- A hospital revenue bond is a type of municipal bond that finances the construction of new facilities or upgrades for existing hospitals, secured by the revenue that hospitals earn during their normal operations.
- Due to the higher default risk and inability to raise revenue through taxes, hospital revenue bonds typically offer higher yields.
- Income from hospital revenue bonds may be exempt from state, local, and federal taxation.
Delving Deeper into Hospital Revenue Bonds
Hospital revenue bonds can also be utilized for acquiring new equipment for these facilities. Generally, bondholders receive payment only after the expenses of running the hospital are fully paid. This can create a risk for bondholders if the hospital isn’t as profitable as expected.
Hospital revenue bonds are among the riskiest types of municipal bonds. As indicated by their name, revenue bonds are backed by the revenue that the specific project can generate. If this revenue is insufficient, municipalities are not obligated to use other funds to pay back bondholders.
Unlike municipalities, hospitals cannot tax residents to cover expenses or repay debt. This limitation means hospital revenue bonds usually command higher yields due to their higher default risk compared to general obligation bonds.
Rating firms evaluate a revenue bond issue and assign a rating indicating the likelihood that the obligation will pay out on schedule. Hospital revenue bonds relying on government-funded programs like Medicaid and Medicare are considered higher-risk investments. Uncertainty due to potential changes in the healthcare market and insurance laws creates an unpredictable environment for hospitals and the bonds that support them. Nevertheless, when there is a decrease in supply in the municipal bond market, hospital bonds with higher risks become more appealing to investors.
Tax Considerations for Hospital Revenue Bonds
Income received from a hospital revenue bond may be exempt from state, local, and federal taxation. However, this exemption varies by location and application of current tax laws, which are subject to change. In 2017, a tax plan proposed by Congress initially aimed to prevent hospitals from issuing tax-exempt bonds. This proposal prompted many hospitals to rush for funding before the legislation could take effect.
Several major hospital groups protested the proposed change, warning that eliminating the tax break would result in higher borrowing costs. Increased costs could limit or reduce their ability to expand, renovate, or build new facilities, thereby impacting local communities negatively. The final tax plan did not include the proposed legislation.
Other Types of Municipal Revenue Bonds
Revenue bonds are backed by the revenue streams generated by a specific project. Other municipal revenue bonds may fund toll roads, airports, harbors, public housing projects, or public utilities. These bonds have a higher risk than general obligation bonds but may pay a higher interest rate because of that risk.
Revenue bonds contrast with general obligation bonds, which are repaid through various tax sources. GO bondholders rely on the full credit of the issuing municipality as no assets are used as collateral.
For example, in an airport revenue bond, the municipality issues a bond to build a new terminal. The bond depends on revenue from airport activities such as landing fees, terminal rents, concession revenue, and parking charges to back the debt. Once completed, these income streams enable the city to pay off the bond.
Related Terms: municipal bond, general obligation bond, default risk, high yield bond, Medicare, Medicaid.
