The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committee on Health & Homelessness and House Committee on Economic Development on March 22, 2023.
March 22, 2023
Conference Room 329
To: House Committee on Health & Homelessness
Rep. Della Au Belatti, Chair
Rep. Jenna Takenouchi, Vice Chair
House Committee on Economic Development
Rep. Daniel Holt, Chair
Rep. Rachele F. Lamosao, Vice Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: SB1035 SD2 — RELATING TO THE GENERAL EXCISE TAX
Dear Chair and Committee Members:
The Grassroot Institute of Hawaii would like to offer its comments on SB1035 SD2, which would provide a general excise tax exemption for medical services provided by healthcare providers to patients who receive Medicare, Medicaid or TRICARE.
With this bill, the Legislature would bring Hawaii into the mainstream of states that do not tax medical services on Medicare, Medicaid or TRICARE. At present, Hawaii is one of only two states that levies a tax on medical services and the only state to tax Medicare and TRICARE.
Though nonprofit facilities are currently exempt from the GET, private practice physicians are not. Thus, private practice doctors and clinics must pay the 4% GET plus any county surcharge. As the Grassroot Institute explains in its new report, “The case for exempting medical services from Hawaii’s general excise tax,” the GET becomes a significant expense for doctor offices, making it difficult for such practices to thrive in our state.
A further problem comes with the application of the GET to TRICARE, Medicare, and Medicaid beneficiaries. As explained in the Grassroot Institute report, the GET cannot legally be passed on to TRICARE or Medicare patients, forcing doctors to absorb those costs entirely.
Similarly, in the case of Medicaid, doctors are forced to either pursue an indigent patient for their share of the GET, which may result in higher administrative costs than can be recouped, or deny service based on the patient’s inability to pay the tax.
Under the circumstances, many private practice doctors consider it impossible to pass the tax on to Medicaid patients as well.
The result is that physicians are either disincentivized from treating Medicare, Medicaid and TRICARE patients or forced to absorb the GET for those patients.
Fortunately, there is a simple and effective solution, as described in this bill: Create a GET exemption for medical services provided to Medicare, Medicaid, and TRICARE patients.
According to research from the Grassroot Institute of Hawaii, exempting all medical services from the excise tax would help make healthcare more affordable in the state for both doctors and residents.
Healthcare spending for medical services in Hawaii totals about $9 billion a year, of which the for-profit private sector accounts for $5 billion. An exemption from the state’s 4% GET would save private, for-profit medical providers approximately $200 million. Waiving the GET surcharges imposed by the counties would save an additional $22 million more.
This would result in substantial savings for individual practices. According to the Grassroot Institute study, the savings from that base 4% GET exemption would be about $5,275 each for the approximately 38,000 full-time workers in the medical industry. That’s the equivalent to 6.7% of the average medical service worker’s wage and 5.8% of current GET collections.
Of course, those figures are for all medical services, not solely those services provided to Medicare, Medicaid and TRICARE patients. Thus, the loss of revenue from this exemption would be less, as would the savings to doctor offices and clinics.
In any case, given that the state is projecting a surplus of more than $10 billion over the next four years, the budget could easily absorb the expense of this exemption.
There are other possible benefits to this exemption. Not only would it help reduce the cost of medical care for Hawaii residents, it likely would help alleviate the state’s doctor shortage.
The most recent report from the Hawaii Physician Workforce Assessment Project estimates that the state has an unmet need for 776 full-time-equivalent physicians. The largest area of need is in primary care, but there are significant shortages across multiple specialities.
The COVID-19 crisis helped emphasize the importance of improving healthcare access in Hawaii. It also demonstrated that we must pursue multiple strategies to address the shortage of healthcare professionals in the state.
Luring new doctors to Hawaii — and keeping those who are already here — is a complicated proposition. Many proposals would take years to demonstrate success in addressing the issue.
In the meantime, Hawaii residents will continue to suffer from the shortage of available medical professionals and the high cost of healthcare in our state.
It is hard to know exactly how beneficial this GET exemption for medical services would be, but it would at least remove a major burden for existing local practices. If this bill prevents more doctors and clinics from leaving the state or closing, it will have accomplished its goal.
At minimum, this bill might help address the disincentive that currently exists for private practice physicians to treat Medicare, Medicaid and TRICARE patients, as they will no longer be forced to absorb the cost of the GET in those cases.
It is common practice for the state to use GET exemptions to encourage or aid certain industries. Already, Hawaii exempts petroleum refining, orchards, and aircraft maintenance and leasing from the GET. We think healthcare is at least as important as any of those activities, if not more so, and I would hope that the members of this committee think so too.
State policymakers are rightly concerned with making healthcare more affordable and addressing the shortage of medical professionals in Hawaii. By creating a general excise tax exemption for medical services provided under TRICARE, Medicare and Medicaid, there is an opportunity to make Hawaii a more attractive — and less expensive — place to practice medicine.
Thank you for the opportunity to submit our comments.
Director of Strategic Campaigns
Grassroot Institute of Hawaii
 Malia Hill, “The case for exempting medical services from Hawaii’s general excise tax,” Grassroot Institute of Hawaii, February 2023.
 “How the state GET affects healthcare costs in Hawaii,” Grassroot Institute of Hawaii, January 2020.