Determinants of Interest Rates on Tax-Exempt Hospital Bonds

63 Pages Posted: 4 May 2007

See all articles by Michael Grossman

Michael Grossman

National Bureau of Economic Research (NBER), NY Office; CUNY The Graduate Center - Department of Economics

Fred Goldman

The New School; National Bureau of Economic Research (NBER)

Susan W. Nesbitt

New School for Social Research

Pamela Mobilia

CUNY Brooklyn College - Department of Economics

Date Written: August 1992

Abstract

The aim of this paper is to examine the determinants of interests rates on tax-exempt hospital bonds. The results highlight the potential and actual roles of Federal and state policy in the determination of these rates. The shift to a Prospective Payment System under Medicare has subsidized the borrowing costs of some hospitals at the expense of others. The selection of underwriters by negotiation rather than by competitive bidding results in higher interest rates. It is cheaper for hospitals in states with relatively high income tax rates to issue debt. The Federal tax act of 1986 raised the cost of hospital debt by encouraging bond issues to contain call features. Are the interest rate effects associated with these policies desirable or undesirable? This question can not be answered in the absence of estimates of the optimal subsidy that an average hospital should receive via its participation in tax-exempt markets, how this subsidy should vary among hospitals with different characteristics, and how the welfare costs associated with this subsidy can be minimized. Our results do not contain these estimates but they underscore that the differentials at issue are substantial.

Suggested Citation

Grossman, Michael and Goldman, Fred and Nesbitt, Susan W. and Mobilia, Pamela, Determinants of Interest Rates on Tax-Exempt Hospital Bonds (August 1992). NBER Working Paper No. w4139. Available at SSRN: https://ssrn.com/abstract=981140

Michael Grossman

National Bureau of Economic Research (NBER), NY Office ( email )

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Fred Goldman (Contact Author)

The New School ( email )

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National Bureau of Economic Research (NBER)

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Susan W. Nesbitt

New School for Social Research

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Pamela Mobilia

CUNY Brooklyn College - Department of Economics

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Brooklyn, NY 11210-9966
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