Health care organizations, whether for-profit or tax-exempt, have access to significant financial savings through the Inflation Reduction Act enacted in August 2022. Health care companies can take advantage of the tax credits in the IRA, particularly around clean energy investments, by carefully reviewing their operations and identifying areas where they can make energy efficiency improvements, install renewable energy systems, or develop and manufacture new medical devices.
Additionally, for-profit health care organizations who are planning to or are already investing in qualified clean energy projects will have the option to transfer (sell) tax credits earned with these investments to another taxpayer for cash. According to the Congressional Budget Office, an estimated $213 billion of tax credits could be transferable for taxpaying entities, which may create a new demand from a variety of investors. As the cost of capital continues to rise with elevated interest rates, selling a tax break provides short-term liquidity which can be attractive for private equity investors in the health care space.
Below is a summary of the 12 major types of tax credits in the IRA, 11 of which are transferable.
Aligning with ESG initiatives
In addition to the tax credits and financial savings available to health care organizations, the IRA can serve as a catalyst for health care organizations looking to execute on environmental, social and governance strategies.
Based on data compiled by The New England Journal of Medicine, the health care sector accounts for 8.5% of the United States carbon footprint. Efforts to reduce a health care facility’s carbon footprint could produce long-term benefits to the communities they serve by reducing emissions which can impact the long-term health and safety of patients and improving risk management strategy and governance practices, especially as governing bodies continue to release ESG standards and regulations. An example of the impact of decarbonization efforts on patients and communities could include the decrease of asthma and other respiratory issues for families living near hospitals and health systems, for instance, due to implemented clean air strategies.
Health care governing bodies such as the Joint Commission, which has accredited over 22,000 health care organizations in the United States, recently announced a voluntary sustainability certification program for hospitals which will be effective Jan.1, 2024. The program will help health care organizations design an action plan to expand their sustainability practices and decarbonization efforts. Additionally, the Security and Exchange Commission has unveiled their plan to enhance and standardize climate-related disclosure for investors to showcase the importance of ESG issues among public companies. And, California recently passed sweeping ESG rules, similar to the SEC’s proposal, that could have broad impacts for private companies in addition to public companies.
As regulations evolve, it is imperative that health care leaders inventory environmental and sustainability practices in place and understand the evolving standards available to learn how to meet and exceed the various regulations and programs that emerge in the near future.
Health care organizations looking to invest in capital infrastructure should evaluate where they can invest in clean energy assets to capitalize on the tax savings available through the IRA. These efforts can also align with an organization’s ESG strategy as well. Sustainable practices can provide long-term benefits to communities and could reduce enterprise risks by complying with emerging ESG regulation and compliance programs.