Death, Bankruptcy, and the Public Hospital

Even before the pandemic, the 90,000 local governments in the United States faced grim fiscal positions. During the pandemic, revenues cratered, costs increased, and many local governments teetered on the brink. Yet few of them considered filing for bankruptcy, though Chapter 9 of the Bankruptcy Code is designed for local governments.

The choice to eschew bankruptcy owes, in part, to scholars of Chapter 9, who conclude that it offers little for political subdivisions, like Detroit. But most local governments are not political subdivisions. They are government-owned businesses, like public hospitals, toll roads, and utility districts.

This Article expands the purview of bankruptcy scholarship to those government businesses, assessing how Chapter 9 operates for them. It does so by taking public hospitals as a case study, offering a comprehensive look at every public-hospital bankruptcy between 1988 and 2021.

What those bankruptcies reveal has implications for government bankruptcy and policy. For government bankruptcy, these public hospitals show that there are in fact two Chapter 9s. The one for political subdivisions may be dysfunctional, as scholars suggest, because bankruptcy can-not solve political problems. But the one for government businesses works effectively and, for hospitals, almost amiably. It helps communities maintain their hospitals and ensures that creditors receive what the Code demands, all without the rancor and creditor foot-dragging that dooms city and county bankruptcies.

The upshot, which policymakers should heed, is that bankruptcy can save some public hospitals that would otherwise close. That result should prod states toward authorizing such bankruptcies and in turn helping communities save their hospitals.