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Determinants of interest rates on tax-exempt hospital bonds

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  • Grossman, Michael
  • Goldman, Fred
  • Nesbitt, Susan W.
  • Mobilia, Pamela

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.
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Suggested Citation

  • Grossman, Michael & Goldman, Fred & Nesbitt, Susan W. & Mobilia, Pamela, 1993. "Determinants of interest rates on tax-exempt hospital bonds," Journal of Health Economics, Elsevier, vol. 12(4), pages 385-410, December.
    • Handle: RePEc:eee:jhecon:v:12:y:1993:i:4:p:385-410
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    1. Sorensen, Eric H, 1979. "The Impact of Underwriting Method and Bidder Competition upon Corporate Bond Interest Cost," Journal of Finance, American Finance Association, vol. 34(4), pages 863-870, September.
    2. Sloan, Frank A. & Valvona, Joseph & Hassan, Mahmud & Morrisey, Michael A., 1988. "Cost of capital to the hospital sector," Journal of Health Economics, Elsevier, vol. 7(1), pages 25-45, March.
    3. Wedig, Gerard J & Hassan, Mahmud & Sloan, Frank A, 1989. "Hospital Investment Decisions and the Cost of Capital," The Journal of Business, University of Chicago Press, vol. 62(4), pages 517-537, October.
    4. Richard G. Frank & David S. Salkever & Jean Mitchell, 1989. "Market Forces and the Public Good: Competition Among Hospitals and Provision of Indigent Care," NBER Working Papers 3136, National Bureau of Economic Research, Inc.
    5. Kessel, Reuben, 1971. "A Study of the Effects of Competition in the Tax-exempt Bond Market," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 706-738, July-Aug..
    6. Hendershott, Patric H & Kidwell, David S, 1978. "The Impact of Relative Security Supplies: A Test with Data from a Regional Tax-Exempt Bond Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(3), pages 337-347, August.
    7. West, Richard R., 1967. "Determinants of Underwriters' Spreads on Tax Exempt Bond Issues*," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(3), pages 241-263, September.
    8. Tanner, J Ernest, 1975. "The Determinants of Interest Cost on New Municipal Bonds: A Reevaluation," The Journal of Business, University of Chicago Press, vol. 48(1), pages 74-80, January.
    9. repec:bla:jfinan:v:43:y:1988:i:1:p:21-40 is not listed on IDEAS
    10. Thorpe, Kenneth E. & Phelps, Charles E., 1990. "Regulatory intensity and hospital cost growth," Journal of Health Economics, Elsevier, vol. 9(2), pages 143-166, September.
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    Cited by:

    1. Sujoy Chakravarty & Martin Gaynor & Steven Klepper & William B. Vogt, 2006. "Does the profit motive make Jack nimble? Ownership form and the evolution of the US hospital industry," Health Economics, John Wiley & Sons, Ltd., vol. 15(4), pages 345-361, April.
    2. Mahmud Hassan & Gerard Wedig & Michael Morrisey, 2000. "Charity Care by Non-profit Hospitals: The Price of Tax-exempt Debt," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 7(1), pages 47-62.
    3. Patrick Bernet & Thomas Getzen, 2008. "Can a violation of investor trust lead to financial contagion in the market for tax-exempt hospital bonds?," International Journal of Health Economics and Management, Springer, vol. 8(1), pages 27-51, March.

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    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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