Friday, July 26, 2013

The Resource Curse, Scaled Down

A week ago, two separate articles featured the Long Island College Hospital. One appeared in the Wall Street Journal. The other in The New York Times. Both described the imminent closing of the hospital due to financial problems. The latter article described a full time medical staff that costs 3 million per week, enough to service a hospital with a capacity of 375 patients. At the time, there were only 18 patients.

The former article described a charitable gift to the hospital from a deceased couple. In the 1990s, the hospital received a 135 million dollar endowment from the Othmer family, the investment proceeds (the principal sum was meant to be untouched) were meant to help fund the hospital's operations in perpetuity. Now, the vast majority of that endowment is gone. Much of it was used to settle medical malpractice suits and to finance renovations of the hospital.

It amazes me that such a generous gift could have been squandered in such a short amount of time. It costs a lot of money to run a hospital. But a charitable gift, meant to be held in a trust with its principal sum untouched, should not have been squandered like that. Court ruling after court ruling effectively stated that, were the Othmers alive today, they would have wanted (or at the very least, consented) the hospital to liquidate portions of their trust.

The fact that the hospital has a full time staff and no patients to treat also amazes me. Union rules prevented the hospital from furloughing unneeded staff and, in any case, the hospital administration had to have been incompetent if it needed to dip into a charitable trust to pay for settling/litigating medical malpractice suits. This is simply the resource curse scaled down.

Any organization that happens upon a windfall that they didn't earn is likely to squander that windfall. It's the reason why great fortunes are so often lost by the succeeding generations. They take the money for granted. They count on that money being there to support them. And they keep spending it, and spending it, until, suddenly, it doesn't exist anymore.

And that's what happened at Long Island College Hospital. Any competent administrator should have realized that, while 135 million dollars seems like a lot of money, for a hospital trust, it can't contribute any more than 11 million dollars in a good year without dipping into the principal amount. 11 million dollars is not a lot of money when you consider how much money it takes to support a hospital. And that's in a good year. The average year would be around 7-8 million dollars.

That's enough to support a couple dozen extra nurses and doctors per year. But you can't count on that money to do much more than that. And once you start dipping into the principal, then you're in even worse shape because suddenly a couple dozen extra nurses and doctors turns into only a dozen. Or half a dozen. Or none, once you've spent all the principal amount.

The end result is that a great fortune, one that was meant to explicitly provide for a community, is used to hasten the community's downfall. The vast majority of people have a hard time readjusting to a lower baseline of spending, which is why so many of them dip into their savings/principal investments to begin with. It's better to keep living like nothing's wrong at the expense of the future. Because who knows? Maybe somebody else in the future will come along and bail you out. The sad reality is that it never works out that way.

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