Hospital Revenue Bonds

A hospital revenue bond is a municipal bond issued to finance construction, renovation, or equipment purchases for hospitals. Unlike general obligation (GO) bonds, hospital revenue bonds are repaid from the specific revenues generated by the hospital’s operations rather than from tax revenues.

Key takeaways

• Secured by hospital operating revenues (patient fees, service charges, etc.), not by taxes.
• Payments to bondholders typically occur only after operating expenses are paid, increasing risk.
• Generally higher yield than GO bonds because of greater default risk.
• Interest may be tax-exempt at the federal, state, or local level depending on law and location.
• Reliance on government payers (e.g., Medicare/Medicaid) and changes in healthcare policy increase uncertainty.

How they work

Hospital revenue bonds raise funds for capital projects (new facilities, upgrades, equipment). The bonds are backed solely by the revenue streams generated by the hospital—patient fees, charges for services, and other operating income. If those revenues are insufficient, the issuer is not typically obligated to use other municipal funds to cover debt service, which raises default risk.

Bondholders usually receive payments only after the hospital covers its operating expenses and any bond covenant requirements (reserve funds, coverage ratios). Because hospitals cannot levy taxes, their bonds generally carry higher yields to compensate investors for this extra risk.

Risk factors

• Revenue volatility: Patient volumes, payer mix, reimbursement rates, and insurance coverage changes affect cash flow.
• Government funding exposure: Heavy reliance on programs like Medicare and Medicaid can increase vulnerability to policy or payment changes.
• Operational performance: Inefficiencies, rising costs, or unexpected losses reduce available revenue for debt service.
• Market conditions: In periods when municipal supply is low, risk-tolerant investors may bid more aggressively for higher-yield revenue bonds.

Comparison with general obligation (GO) bonds

• Hospital revenue bonds: Backed by project-specific revenues; higher risk; typically higher yields.
• GO bonds: Backed by the full faith and taxing power of the issuer; considered lower risk and often have lower yields. GO holders rely on the issuer’s broader tax base rather than a single project’s cash flow.

Tax considerations

Interest from hospital revenue bonds may be exempt from federal, state, or local taxes, but exemptions depend on the issuer and current tax law. Tax treatment can change with legislation, so potential investors should confirm current tax status for a specific bond issue.

Other municipal revenue bonds

Revenue bonds are used for many project types beyond hospitals, including toll roads, airports, harbors, public housing, and utilities. Each is backed by the income the project produces—tolls, landing fees, rents, user charges—rather than taxes.

What investors should consider

• Review the hospital’s financials, payer mix, and operating trends.
• Check bond covenants: revenue pledges, reserve requirements, and debt-service coverage ratios.
• Consider credit ratings and the issuer’s history of meeting obligations.
• Evaluate tax status and how it affects after-tax yield.
• Weigh higher yields against added credit and operational risk.

Summary

Hospital revenue bonds can offer higher yields but come with elevated risk because repayment depends on the hospital’s operating revenues rather than tax-based support. Investors should assess financial strength, exposure to government payers, bond covenants, and tax treatment before investing.