Bill exempts certain medical services from general excise tax

Dr. Mendel Sato, right, and dental assistant Eliza Ko, left, work on a patient at the Aloha Medical Mission’s dental clinic on April 25 in Honolulu. (Jamm Aquino/Honolulu Star-Advertiser)

A Senate bill exempting private health care providers from general excise taxes for services to patients with Medicaid, Medicare and TRICARE has made it to the governor’s desk.

Senate Bill 1035, introduced by state Sen. Lorraine Inouye, is hailed as long overdue by numerous private-practice doctors and dentists, along with various health care groups, who testified that the tax burden was incongruous for certain medical providers.


Under current law, medical services provided by doctors at a nonprofit hospital such as Kaiser Permanente or The Queen’s Health System are exempt from the GET.

However, doctors working for an independent or group practice or clinic are subject to the full GET.

The costs are not fully reimbursed by Medicaid, Medicare and TRICARE, leaving providers to cover the differentials. At the same time, federal law prohibits passing the GET to patients.

This, according to the Hawaii Medical Association, created an unfair tax burden on independent medical providers.

Struggling financially under the weight of these expenses, many physicians end up closing or leaving, resulting in fewer health care services for traditionally underserved populations, including Hawaiians and Pacific Islanders.

Dr. Elizabeth Ann Ignacio, HMA president, said the Legislature’s passage of the measure on May 1 will be marked as a historic day.

“This legislation returns fairness to the taxation of medical practices, allowing more physicians to work in Hawaii and increasing access to care for Hawaii’s most vulnerable populations,” said Ignacio in a news release. “The members of the Hawaii Medical Association thank our government leaders for their foresight in passing this important legislation; this is a critical step in creating the medical infrastructure needed for a healthier Hawaii.”

Ignacio thanked Inouye and state Sen. Joy San Buena­ventura, chair of the Senate Committee on Health and Human Services, for being champions of the measure.

Tom Yamachika, president of the Tax Foundation of Hawaii, said the bill corrects an inequity in the system.

That inequity affects medical practices on neighbor isles in particular, he said, which tend to have more private, solo practitioners and smaller clinics.

“They have to pay full freight,” he said. “Because of this phenomenon, there was a lot of departure, especially from the neighbor islands. We have clinics moving, doctors moving away.”

The bill was carried over from 2023, and attempts at similar legislation had been introduced in previous years.

If signed by Gov. Josh Green, the law goes into effect Jan. 1, 2026.

Inouye said she proudly introduced the bill “at the behest” of Hilo constituents who are local medical practitioners.

“This measure especially benefits rural healthcare providers and patients, who often face challenges in accessing quality care due to limited resources and funding,” said Inouye in a statement.

Buenaventura noted the measure will result in a loss of $70 million to $84 million in annual revenue but is expected to benefit providers who care for Hawaii’s kupuna and limited-income families.

“With this bill’s passage, we remove a major disincentive in servicing the underserved community,” she said, “and hope we can prevent the further loss of physicians, dentists and other medical providers, and save the health industry approximately $74 million per year.”

The bill had widespread support — from AARP Hawaii to the Hawaii Medical Association, Hawaii Dental Service, Hawaii Provider Shortage Crisis Task Force, Pearl City Medical Associates, Maui Lani Physicians and Surgeons, Big Island Docs and Hawaii County Mayor Mitch Roth, among many others.

The University of Hawaii System, represented by Lee Buenconsejo-Lum, interim dean of the John A. Burns School of Medicine, and UH Manoa Provost Michael Bruno, testified in support of the bill, noting that the state faces a shortage of almost 800 physicians.

Increasing costs and reduced reimbursements have negatively affected primary care providers, the UH System said, with many struggling to keep their practices open. In JABSOM’s surveys asking what could be done to recruit and retain more physicians, the fourth most popular answer was eliminating the GET on medical services.

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