Taxing Medical Practice to Death

by Tom Yamachika, President, Tax Foundation Hawaii

By now everyone knows that we’re in a state of emergency.  There’s a virus spreading through the population and killing people.  There’s no vaccine, and no confirmed effective therapy such as drugs, so if you get sick from it there’s a chance that it will be game over for you.

Unless, of course, you are lucky enough to get good medical care.  Then you have a much better chance of surviving.

Medical professionals, however, are in short supply.  Like alcohol, hand sanitizer, face masks, and toilet paper.

Take the Big Island, for example.  In a video interview on State of Reform, a website focused on health care policy in the five westernmost states, Dr. Scott Grosskreutz, a radiologist and president of the Hawaii Radiological Society, mentioned that there is now a 44% shortage of physicians on the Big Island, and that a third of the doctors remaining are 65 years old or older.  ‘[P]rivate practice is basically on the verge of going extinct,” he said, because already low profit margins are being pressured by “the GET tax and the low Medicare reimbursements along with the high cost of providing care.”

He continues:  “We’re also reaching out to the legislature and stating that the general excise tax of 4.7% with the county surcharges basically strips a lot of these narrow-margin medical practices and puts them into the red. So, if the GET and the surcharges were applied to the hospital system, our understanding from talking to the Healthcare Association of Hawaii is that most if not all hospitals in Hawaii would be in the red and would have to either limit services or possibly close. So, if the state legislature agreed that the GET tax on hospitals and hospital-employed physicians is a bad idea because would it cause collapse of that portion of the sector, why would you apply it to community-based physicians?”

His observation about GET potentially killing off medical practices has basis in history.  All hospitals in Hawaii now are section 501(c)(3) tax-exempt nonprofit companies that enjoy an exemption from the GET based on their tax-exempt status.  A for-profit entity, HMC LLC, bought St. Francis West in Ewa Beach in January 2007.  It did not have an exemption from the GET.  It was in bankruptcy 20 months later.

Running a medical practice here in Hawaii does not seem to be an easy path to making tons of money.  Our State runs a few hospitals, for example, and its portfolio used to include Maui Memorial Hospital in Kahului.  It was losing tens of millions of dollars each year, so much money that state lawmakers, bucking fierce union opposition and lawsuits, succeeded in privatizing it in 2017.

For rural areas not conveniently near a big hospital, including entire islands without a hospital, their front-line defense against diseases in general must be the small businesses run by doctors who have taken up residence in the community.  Certainly, they are not tax-exempt entities like the hospitals are.  They are ordinary people, or groups of people, out to feed their families like many of us.  Maybe a distinction needs to be drawn between the small rural practices described here and specialty doctors pulling down millions of dollars a year.  Whatever we may think of the latter, there may be a good case, from a public policy perspective, for giving some tax relief to the former.

Unless you like the idea of having doctors in rural areas being scarcer than toilet paper is now.