One of the bills in this past legislative session that fell to the cutting room floor when it probably shouldn’t have was Senate Bill 1035, which would have exempted medical services provided by health care providers if the services were paid for by Medicaid, Medicare, or TRICARE (the health care system for the uniformed services).
At first, it looks like a dumb bill. Yes, health care providers get paid for their services, and they pay general excise tax (GET) on those services. So do most other providers of services like lawyers, accountants, and computer repair shops. And besides, the doctors and other providers are rich anyway, so why do they need a tax break?
But consider this. Many doctors work at hospitals. Some of them could be considered wealthy depending on how you define wealthy. But the GET is not in play here at all. It’s not imposed on the doctors, nor is it imposed on the hospitals. Why?
The doctors as employees of the hospital don’t pay GET because employees don’t pay GET on their wages. That’s why most of us poor saps who trudge into work every day and collect a paycheck a few times a month don’t need to worry about GET.
For the hospitals, those now in Hawaii are either government entities (Hawaii Health Systems Corporation hospitals) or nonprofit organizations (Queen’s, Kaiser, Kapiolani are examples). Government entities don’t pay GET because the government doesn’t tax itself. Nonprofits don’t pay GET because the tax law says that nonprofits get a tax exemption for money they make for activities that are central to their exempt purpose.
Being a hospital, infirmary, or sanitarium “as such” counts as an exempt purpose in the GET law, so the payments the hospital gets for medical services beat the tax. The tax still catches income from any side hustles, such as parking fees or vending machines, but that revenue is peanuts compared to payments for medicine and medical services.
So, let’s go back to doctors and other health care professionals. If they practice with a nonprofit hospital, then the GET doesn’t apply either to the hospital or to the professionals. If they open up their own clinic or are in solo practice, the GET applies with full force.
Medicaid, Medicare, and TRICARE pay the same money for the same medical procedures regardless of who performs them, and they require the recipients of that money to just take it and be content with it. When GET is applied to the medical bills, the laws governing Medicaid, Medicare, and TRICARE prohibit the medical professionals from passing that tax on to the patient (or anyone else).
Does anyone other than me think that there’s something wrong with this picture?
Even if you might not have sympathy for the health care professionals in general, it does seem that doctors and other health care professionals in private practice, who are especially important to support Neighbor Islands and rural communities, are getting the short end of the stick for no good reason.
Maybe our lawmakers can do something about that in the next legislative session.
•••
Tom Yamachika is president of the Tax Foundation of Hawai‘i.
