Fairness one reason to expand GET break for medical services

from Grassroot Institute of Hawaii, May 9, 2024

There are several reasons to enact into law a bill that would exempt Hawaii doctors and dentists from the state general excise tax on services paid for by Medicare, Medicaid and TRICARE — and those were discussed during the April 18 episode of “Talking Tax” on ThinkTech Hawaii.

The program was hosted by Tom Yamachika, Tax Foundation of Hawaii president, and Mark Coleman, Grassroot Institute of Hawaii managing editor, who were joined by featured guest Malia Hill, Grassroot Institute policy director.

Yamachika said one reason to enact the exemption as called for in SB1035 is the “fairness issue.” He noted that nonprofit hospitals are exempt from the GET, but small physician practices and clinics are not. 

Not only is that unfair for private practice doctors and dentists, but where, he asked, “does that leave people in rural areas or without a hospital close by? The only healthcare they have is these small physician practices … and right now, the GET is set up to whack them.”

Hill clarified that private practice doctors in Hawaii can pass along the tax to patients covered by Medicaid, but “it’s uncomfortable.” 

“Do you want to just charge your Medicaid patient, someone whom you’ve established is financially in need? You want to just give them a bill for the tax?” she asked.

Coleman said another reason to sign SB1035 into law is that it could be considered “money well spent” to help solve the state’s doctor shortage.

And, Yamachika said, “You have a societal need. People get sick.”

Hill said the cost of the exemption to the state would be about only $50 million to $65 million, but that would likely be offset by increased economic activity generated by the tax break. 

An additional reason to support the bill, Hill said, is that Hawaii is now the only state that taxes medical services. New Mexico previously did so, but stopped last year.

“Nowhere else in the country are people taxed to go to the doctor,” Hill said. “Nowhere else do they say, as a matter of public policy, government should take some of the money that changes hands when you’re sick.”

TRANSCRIPT

4-18-24 Malia Hill with Tom Yamachika and Mark Coleman on “Talking Tax”

Mark Coleman: Good morning, everybody. This is Mark Coleman. I’m Mark Coleman from the Grassroot Institute of Hawaii, and I’m here today for “Talking Tax.” It’s a program that Tom Yamachika, president of the Tax Foundation, has been hosting for years here on ThinkTech Hawaii. And today, we’re going to talk about a bill that is still alive in the 2024 state Legislature: Senate Bill 1035.

It would provide a GET exemption for medical services, and I believe dental services — some of them anyway — paid for by Medicaid, Medicare and TRICARE. 

It’s got an interesting history and involves a number of issues that could affect tax, doctor shortages, doctor fairness, tax fairness and so on. 

Let’s talk about it. Let’s have Tom set the stage here once again.

Tom Yamachika: OK, and thank you very much, Mark. Be sure to further …

Coleman: By the way, Tom, I know you’re probably going to cut me off, but we have a special guest today … 

Yamachika: I was just going to introduce her. But you can go ahead.

Coleman: [laughs] I got carried away. It’s Malia Blom Hill, our policy director from the Grassroot Institute of Hawaii, who, like you, Tom, carefully monitors what’s going on over at the Legislature. That’s why we invited her. She’s well up on this bill. She helps write most of our testimonies — or writes most of our testimonies, actually. So, just want to acknowledge Malia. Thank you very much for being here today, Malia. Finally got you on the program.

Hill: Thank you for having me. I’m glad I could finally join.

Yamachika: Malia is joining us from Washington, D.C., today, or somewhere close to it. And like Mark said, she does some legislative monitoring from her lofty perch, wherever she’s at. And she is one of the architects behind the Grassroot Institute’s current position on this GET exemption.

Now, let’s start with this GET exemption. It kind of has a tortured history. It was introduced last year, basically in the form that it is now, and we’ll have more on that in a second. But the exemption would apply to payments to healthcare providers by either of the three big government payers: Medicare, Medicaid and TRICARE. 

The bill went through the Legislature last year — this is Senate Bill 1035 — it went through the Legislature last year, crossed over to the House, but the Finance committees didn’t hear it, so it stopped there.

This year, another bill, House Bill 1675, got introduced, and it would have exempted primary care, rather than whoever the payer was. It would have exempted primary care for I believe doctors and certain nurses, and that bill went all the way from the House to the Senate, but got stopped in the Ways and Means Committee. 

When that happened, the Finance Committee, who was kind of the holdup on the issue last year, said, “All right, we got a two-year session. Let us resurrect Senate Bill 1035, which is one of last year’s bills” — the same bill from last year — and it’s now moving into conference.

Coleman: Yeah.

Yamachika: So the question is: Why is a GET exemption worthy in our current time of financial need? OK? 

Coleman: When you say “financial need,” you’re talking about the state.

Yamachika: The state in general.

Coleman: Yeah, we’re all financially in need around here, but they’ve got big problems this year.

Yamachika: Yeah, I mean, it was bigger a little bit before. I think the Council on Revenues has backed off a little, saying it’s not as bad as we thought it was going to be, so there is some room for tax reform, and this is one of the bills being looked at for tax reform.

And the question again is: Why? 

But let’s start off by looking at the fairness issue. And the fairness issue is that individual or small group physician practices get taxed at 4.5% on their gross proceeds from healthcare. 

However, hospitals that are organized as nonprofits — and all of them are because of this issue, I think — are exempt from the GET on the same medical services.

Now, the insurers and big government payers pay healthcare providers the same fee for the same services. It doesn’t matter whether they’re taxable or tax-exempt. 

Furthermore, they said that if you’re going to sign on and get paid by Medicare, Medicaid or TRICARE, you must accept what we pay you in full payment for your services, meaning you cannot go and surcharge your patient or anybody else for the tax, which is what some, like my dentist, for example. He surcharges me the GET they impose on him, and I gotta pay like $5 or something every time I go see the dentist.

Hill: Yeah, that’s that “pass it on” thing. The idea that you can pass it on, pass it on. And the Hawaii Department of Taxation has basically stated “They can pass it on, they can pass it on.” And then doctors are saying, “No, no, not necessarily.”

Coleman: And Malia has pointed out — they do include Medicaid here, I believe, but I don’t think — they could pass that along, right, Malia?

Hill: That’s actually the gray area. We’ve talked to a lot of doctors, and they were concerned because the Department of Taxation put out guidance saying, you know, “Just pass it on, even for TRICARE or Medicare, Medicaid.” 

And the doctors knew that TRICARE won’t let you do it, and they sought guidance from Medicare, which came back and said, “No, you cannot pass that on. If you do, we will come after you,” basically.

And Medicaid is a gray area where some of them [doctors] are afraid to [pass it on] because they think they’ll be treated like Medicare. And some of them just don’t want to because it’s uncomfortable — you know, as Tom was saying, do you want to just charge your Medicaid patient, someone whom you’ve established is financially in need — you want to just give them a bill for the tax? It’s a very strange thing. 

So even if they were comfortable, even if they were sure it was legal, which there is a bit of a question mark about for some doctors, they don’t want to because it’s the opposite of what you feel you should be doing when it comes to a Medicaid patient.

Yamachika: Yeah, Medicaid patients are, by definition, those who lack the money that most of us have.

Coleman: They’re struggling.

Yamachika: So they’re in need. So, what, you’re going to bill them and then not bill anybody else? That seems totally wrong.

Coleman: Yeah, and then…

Hill: Plus, one has to wonder about the administrative costs of chasing down a Medicaid patient for the tax. It’s just something that they don’t really say, but it doesn’t cost nothing to the office to try to tax that Medicaid patient for the office visit or whatever. And that just piles on to the amount that the doctor ends up owing to the state.

Coleman: So, regardless of the gray area, this bill would clarify that paying a GET on the reimbursements from those programs — all three of them — would be exempt from the GET.

Yamachika: Right, it would create parity with the hospitals.

Coleman: Right. And historically, I’ve heard about doctors quitting their private practices to go work with hospitals, and this is probably one reason, right?

Yamachika: Probably. I mean, if you work with a hospital, you’re an employee of the hospital. The hospital is tax-exempt, so you as an employee don’t get GET-taxed on your salary. There’s an exemption from the GET for salaries. OK? So you beat the tax that way.

But where does that leave people in rural areas or without a hospital close by? I think the short answer is: The only healthcare they have is these small physician practices or mini clinics located where they are, and right now, the GET is set up to whack them.

Coleman: One of those recently closed. We had a seminar a year or two ago featuring a few local doctors, including one on Kauai — Kauai, a rural clinic. And he was saying this tax is just beating me down; I don’t know how much longer we can survive. He had horrible stories about the doctor shortages over there and how it was ridiculous that this tax policy is discouraging the doctors from continuing their important work. And sure enough, within the year, he had to close that clinic. Kauai North Shore Clinic or something like that.

Hill: Yeah, there are something like 160 pages of testimony on this bill when it got heard in the Finance Committee when they resurrected it and heard it in the House Finance. You know, there’s no testimony in opposition — all of it is in support or comment. And an enormous amount of it is just from individual doctors saying, “Please, we need this. We can’t operate.”

One of the gastroenterologists from Aloha Gastroenterology talks about how they still treat Medicare, Medicaid, and TRICARE patients, but some don’t because having to pay the tax, because the tax on Medicare, Medicaid, and TRICARE, you know, it’s owed to the state out of the doctor’s receipts. So the doctor is responsible for it. So the federal governments’ reimbursement payments, they come, but they are boxed in, and they can’t pass the tax on, so they still owe the tax to the Hawaii state government, so they have to, it comes out of their gross receipts.

Coleman: Yeah.

Hill: Two years ago — well, in 2020, so more than two years ago — in 2020, there was another version of this bill working its way through the Legislature right until everything shut down [due to the COVID-19 lockdowns]. 

And when that bill was being heard, the Hawaii Medical Association was testifying in favor of it, and they basically said that paying the GET for private practice physicians in Hawaii ends up being about 13.5% of their net revenue. 

So that’s not an insignificant amount of their margin. And they’re basically just saying this destroys our margin, that we don’t take Medicare or Medicaid patients now. We can’t and afford to, that kind of thing.

Yamachika: One of the key pieces of testimony was from the state’s Health Planning and Development Agency. 

Coleman: Yeah, as you say in your article.

Yamachika: Yeah, that agency regulates how many health facilities can be set up and where. And they said, and I quote: “Hawaii must exempt independent clinical practices from GET or face increasing shortages and serious health consequences for our population, and particularly our neighbor islands. This is not exaggerated.” End of quote. 

It’s very interesting that a state agency would come out and say that in so many words. 

Coleman: And that agency in particular. That’s a good endorsement for this bill.

What do you think prompted the legislators to revive 1035?

Hill: That’s interesting. I heard gossip, but do you have anything solid on what was involved, Tom? [laughter]

Yamachika: I don’t have anything solid. What gossip did you hear? [laughter]

Coleman: Gossip qualifies.

Hill: Gossip? Pure speculation, allegedly. Well, I think the reason to prefer this one over the other version is because the Medicare, Medicaid, TRICARE is very definite and slightly bigger — it covers more things than the previous version, the one that was being heard this year.

Gossip says that the reason it didn’t pass last year was because there was a little bit of, I don’t know, I gather that the Legislature did not like the push they were getting for it. That the sheer eagerness of the medical community over it had them worrying about it. Although it also could have just been that they decided to do something else instead, because this is the Hawaii Legislature. [laugher]

Yamachika: Yeah, I had heard last year that Finance Chair [Kyle] Yamashita’s decision not to hear the bill was intentional — it wasn’t inadvertent. He just had some philosophical differences with the prospect of giving tax relief to the quote-unquote “wealthy.”

Coleman: Yeah.

Yamachika: That was a big issue last year. You remember last year when Gov. [Josh] Green introduced the Green Affordability Plan, which was a move to give bracket relief to basically everybody, especially for ALICE [Asset Limited, Income Constrained, Employed] families, Speaker of the House, [Scott] Saiki, came right out and said, “No, we’re not going to pass this because we don’t want to give tax relief for the wealthy.” I think that’s perhaps one reason why Finance didn’t proceed with it.

Now, in the meantime, the health agencies are coming in and saying, “Look, we’re losing docs at a furious rate. We have underserved populations now, and it’s getting worse. We’ve got to do something about this.” 

Maybe that’s why they looked at a change of heart.

Coleman: Well, Grassroot did put out a report. For any of them who were concerned about revenue loss — and actually, I think we did get a letter — we sent out an action alert the other day urging people to write their representatives and state senators about this bill — and one [of the recipients wrote back and] said, “Yeah, I’m all for it, but what are they going to do about the money they wouldn’t get if they lift this tax, if they exempt these payments from the GET?”

And I think our study said something like — well, that covered actually primary care doctors in general, not just these payments —but I think the conclusion was that the money they would not bring in will be more than made up, or at least almost made up, by revenues generated by increased economic activity due to the doctors having lower costs.

Hill: Yeah, when we did our report, we said it would only cost about $200 million to exempt everything. And that’s not even what’s at stake here. 

Last year, when DOTAX, the Department of Taxation testified on this specific bill, Senate Bill 1035, they estimated it would only cost somewhere around $50 million to 65 million moving forward, and that’s just the Medicare, Medicaid, and TRICARE one. 

Like to exempt more would cost more, but you do have to consider if it brings more doctors, we’re also just bringing revenues to Hawaii in general, so it kind of balances out and doesn’t end up being as high a cost.

Yamachika: And you have a societal need. People get sick.

Coleman: Right. 

Hill: That was the point.

Coleman: And it’s, if you calculated it as an expense toward solving a social problem, that’s money well spent, it seems to me. 

Hill: Of course, we are the only state that taxes Medicare, Medicaid and TRICARE, for sure which is really just taxing doctors, not Medicare, Medicaid and TRICARE.

Coleman: It’s the reimbursements to the doctors then.

Hill: Yeah.

Yamachika: I think New Mexico too.

Coleman: Not any more.

Yamachika: Not anymore?

Hill: New Mexico passed a law last year, so now we are all by ourself. New Mexico actually allows deductions for copayments and deductibles now from its gross receipts tax, and that went into effect last summer. So we really are kind of on our own now, and Mexico already had an exception for Medicare, Medicaid and TRICARE. 

So, you know, you could say there’s no strong revenue reason. It’s not raking in the money. But even more importantly there’s this public policy. We don’t, you know, nowhere else in the country are people taxed to go to the doctor. Nowhere else do they say, as a matter of public policy, government should take some of the money that changes hands when you’re sick.

So that’s probably the most important element of this. It has an effect on healthcare in Hawaii. We have all these doctors … going: “We can’t afford, it’s too expensive to be in private practice here. Please take this away. It will make it more affordable to have private practice. It discourages people from treating Medicare, Medicaid and TRICARE patients” — well, not necessarily the TRICARE patients, but especially the Medicare and Medicaid patients. 

And yet there’s this resistance. And it’s confusing. Why resist it? It seems so common sense. It seems like such a small ask relative to other things.

Yamachika: OK, well let me be the devil’s advocate then. OK, you’re asking for a tax break for the wealthy. Why don’t you let the free market take care of this, because that’s what it usually does, right?

Hill: Well, I mean, you could say that the free market is taking care of it by sending doctors to the mainland where they can ask for more money. [laughter]

Coleman: Tom, are you leading up to your point that we don’t really have a free market in doctors in Hawaii, which is also true?

Yamachika: Why is that?

Coleman: Well, in your article you blamed it on insurance payments and … what was that other thing you said? “We have a dominance of insurance and government payers”

Yamachika: In the medical services market.

Hill: Yeah, yeah.

Yamachika: That’s true, but is that really a sufficient reason to justify an imbalance in the GET?

Hill: Well, you know, we do have, we use the GET for policy purposes all the time. This one, 1035, would go right under the exemption that is there for renting and leasing airplane engines. So, you know, why do doctors rank below the rent and lease of airplanes? There’s an exemption for orchards, and good knows what else.

Coleman: Yes, that’s another point. There are all kinds of exemptions. We talked about this before, about 50 of them. And you could argue that there should be no exemptions, but if you’re going to have them, this one seems to be a pretty good one.

Yamachika: Yeah, I mean, you can justify some exemptions on the grounds of fairness, that the tax system treats different areas of the same market unequally, which is the case here, because the hospitals skate. So that’s one problem.

Another problem is that you got a service that is necessary for societal good, and there is substantial amount of free market restriction already because of the dominance of these big players.

Coleman: Well, even doctor licensing. That’s one of the original occupational licensure things. 

Milton Friedman wrote a whole chapter in his book — what was the name of that book; well one of his books; “Capitalism & Freedom,” I think it was — and it was a really groundbreaking column by Milton Friedman, renowned economist, about the history of licensure for doctors. 

So it’s a restricted market. It’s not a free market to begin with. That’s why they make more money. They can exclude doctors, they can exclude competition through that system.

But, that aside, it’s still way not a free market. There’s all kinds of interventions into the market. Certificate-of-need laws and so on. And now we have these taxes. So it gets pretty tough.

Yamachika: Yeah, and it doesn’t help that the Department of Taxation has no clue about what the regulatory laws provide.

Hill: Yeah, they’re actually giving advice that other doctors are running around saying, “Don’t listen to this. Don’t listen to this.”

But, you know, you’ve seen the kinds of programs and such that we will endorse in order to solve doctor shortages and healthcare access problems. And, you know, the state would think nothing of pouring hundreds of millions of dollars into a program if it would solve the doctor shortage.

And yet, it doesn’t just say, “Hey, instead of spending hundreds of millions, just forgo collecting $50 million or a hundred to two hundred million, and allow that market to try to take care of itself.

Coleman: Yeah. This has brought up ideas such as pay for schooling of doctors and forgive student loans and all kinds of things that would cost money. And this would be a simpler solution or option.

But just to clarify, Tom, Malia, when we talk about — maybe people don’t know what TRICARE is, and we should explain what that is?

Yamachika: Oh, TRICARE is basically the health insurance program for people in the military, the uniformed services of the United States, including the Army, Navy, Air Force, Coast Guard, and I think some other agencies like NOAA.

Coleman: So when a doctor treats a military person and they get a reimbursement payment from the federal government — from I don’t know who in the federal government — but that becomes taxable?

Hill: It’s just the health insurance for the military, effectively.

Yamachika: Yes. Mostly DOD, the Department of Defense.

Coleman: Do you think this one is going to pass, Tom, Malia?

Yamachika: I keep my fingers crossed.

Hill: Oooh. Yeah, I really hope it does. It has so much support, especially from the medical community. I’m optimistic. I hope it does. I think they have been listening. 

You know, we have the doctor’s licensing compact that passed last year, and the nurse licensure compact that is being considered this year. 

There’s been a willingness to discuss certificate-of-need reform, and these are all healthcare-related reform.

Yamachika: And of course our governor’s a doctor. 

Hill: Yeah, it seems like it goes with this, so one hopes that we’re moving in this direction. Whether we actually do or not, I guess that remains to be seen.

Coleman: I just want to take the last minute here to note that this is probably the last show of “Talking Tax” on ThinkTech Hawaii. 

Tom wrote a wonderful column this week acknowledging, I think, Jay Fidell and Carol Mon Lee, the history of ThinkTech, what a wonderful service it’s been providing through the years.  And it’ll be a sad moment when it stops. It’ll still be around with an archive that can be accessed online.

But Tom’s regular “Talking Tax” program here, we’re going to have to try and find another venue for it. It’s been a valuable program through the years to provide information such as what we’ve been discussing today.

So thank you, Tom, for doing this. 

Thank you, ThinkTech Hawaii, for providing this forum. 

Malia, thanks a lot for being here today. Really appreciate it. I’ll see you down the road.

And Tom, we’ll see you too. 

Alright, much aloha everybody. Thank you very much for being here.