What is a hospital revenue bond?
A hospital revenue bond is a municipal bond that supports building new or upgraded hospital facilities using income from routine operations.
Knowing Hospital Revenue Bonds
Hospitals can buy new equipment via revenue bonds. Bondholders often get payment after clearing hospital bills, which might pose a risk if the hospital is not as profitable as expected.
Hospital revenue bonds are among the riskiest municipal bonds. Project revenue backs revenue bonds, as their name implies. If this revenue is insufficient, towns need not utilize other sources to repay bondholders.
Unlike municipalities, hospitals cannot charge citizens to pay bills or repay debt. Hospital revenue bonds often have higher returns due to the inability to levy taxes. High yields result from increased default risk compared to general obligation bonds.
Rating agencies assess revenue bond issues and score them based on the likelihood of timely payments. Hospital revenue bonds relying on government programs like Medicaid and Medicare are riskier investments. Hospitals and their bonds are vulnerable to healthcare industry and insurance legislation changes. Still, when municipal bond supply is low, investors are more willing to consider riskier hospital bonds.
Hospital Revenue Bond Taxes
State, municipal, and federal taxes may not apply to hospital revenue bond income. However, this varies by area and might alter due to current tax laws. A 2017 congressional tax proposal had an amendment restricting hospitals from issuing tax-exempt bonds. Many hospitals sought financing before the planned legislation took effect.
Several big hospital organizations opposed the idea, arguing that losing the tax advantage would raise borrowing costs. The higher cost would limit their capacity to expand, refurbish, or create new facilities, hurting local communities. The final tax plan eliminated suggested legislation.
Municipal Revenue Bonds Other Types
Project-generated funds back revenue bonds. Municipalities may issue revenue bonds for toll rolls, airports, harbors, public housing, or utilities. Due to their increased risk, these bonds may pay a higher interest rate than GO bonds.
Revenue bonds differ from general obligation bonds (GO), financial obligations serviced through various revenue sources. Holders of GO bonds depend on the municipality’s complete credit, as no assets are necessary as security.
A municipality issues an airport revenue bond to develop a new terminal. Airport revenue backs the bond. After completion, the city will use airport landing fees, terminal rentals, concession revenue, parking costs, and other income sources to repay the bond.
Conclusion
- A hospital revenue bond is a municipal bond that uses hospital income to build new or enhance existing hospitals.
- Due to their inability to levy taxes like municipal bonds, hospital revenue bonds have greater default risk and rates.
- State, municipal, and federal taxes may not apply to hospital revenue bond income.
