Answer to Question #49610 in Economics of Enterprise for Christoph

Question

Why did hospitals borrow so much and load up their balance sheets with debt during the 1980s?

Answer 1

The state is on the hook for up to a half billion dollars to cover bonds from a 1980s-era bailout of private hospitals in New York State, including one that shut its doors two years ago. While the state budget division projects its burden to be only $3 million in the coming fiscal year, the debt service the state expects to pay for eight struggling hospitals and one that has already closed will rise to $32 million in 2014 and $39 million annually starting in 2015.

No one knows how long the hospitals can keep paying back their debt. The governor’s financial plan notes that of the eight hospitals that remain open, “several are experiencing significant operating losses that are likely to impair their ability to remain current on their loan agreements.”

The consequences for taxpayers are spelled out in the state’s financial plan: “In the event there are shortfalls in revenues… the State is liable for the debt service.” That obligation is spelled out in contracts with each of the hospitals. The legislature has no choice but to budget the funds: if it didn’t, the state’s creditworthiness would crumble.

The state faces two options in Brooklyn. It can allow the medical institutions to shut down and pay off much of the debt through sale of the hospitals’ assets, or it can keep bailing out the bailout. Health care workers and local leaders warn that if the state allows the hospitals to fail, the communities will pay dearly.