While Cambridge waits for the state to pay more than $4.7 million owed to the financially troubled Cambridge Hospital, City Councillor William H. Walsh has an innovative plan to keep the institution afloat.

Walsh, who last week sponsored a resolution asking Gov. Michael S. Dukakis to meet with the council to discuss the hospital payments, said yesterday that if the state does not agree to pay, he will seek to borrow money from Harvard to tide over the hospital.

"I've asked [the University] to increase the `in-lieu-of-tax' payments, and they don't want to do that," Walsh said. "Now we need help, and all I'm asking for is help in a business-like fashion."

Cambridge Hospital is one of 13 teaching hospitals affiliated with Harvard's Medical School. Many staff members at teaching hospitals are officers of the University.

The state currently owes Cambridge Hospital more than $4.7 million in reimbursements for free health care provided during fiscal 1987 and 1988, according to the city's annual budget. The state legislature has already allocated an additional $2.5 million for unpaid Medicaid fees, but may reconsider that decision next week.

Last week, the City Council voted to take legal action against the state if Dukakis does not agree to discuss the issue by May 1.

But Walsh said yesterday that if the governor does not agree to a meeting by that time, he would have no choice but to ask Harvard for a loan.

He said his plan is to ask the University to lend the city between $1 million and $4 million at one-half the nation's prime lending rate.

He said that he was not yet sure what Harvard official he would contact to discuss the loan.

"I guess I would ask President [Derek C.] Bok," Walsh said. "I don't know whom to ask."

'A Bad Idea'

City Councillor David E. Sullivan, the only lawyer other than Walsh on the council, said Walsh had not talked with him about the idea of borrowing money from the University. But he said that such a plan was probably not the best solution to the hospital's fiscal woes.

"The concern I have about a loan is that it would be borrowing to pay operating expenses, which is a bad idea in terms of fiscal responsibility," said Sullivan. "If you can't pay it today, there's no reason to believe you're going to be able to pay it tomorrow."

Sullivan added that he had confidence in the ability of city administrators to solve the problem on their own.

Walsh said that he came up with the idea of asking Harvard for a loan at a recent League of Cities and Towns meeting, where he heard of a similar arrangement that had been set up between Northwestern University and Evanston, Illinois. He said that he did not think that there was any precedent for Harvard loaning money to Cambridge.

A spokesperson for Vice President and General Counsel Daniel Steiner '54 said the University had not heard about Walsh's plan and therefore could not comment on it. Officials at the Medical School could not be reached for comment.

The current state budget crisis has created serious fiscal problems for many state hospitals, cutting more than $500 million in state funds. In addition, more than $100 million has been cut in federal Medicare programs.

Several other Harvard-affiliated hospitals have been feeling the crunch, according to city Health and Hospitals Commissioner Melvin H. Chalfen. Massachusetts General, the University's largest teaching hospital, recently announced layoffs and built a deficit into its budget for next year, he said.

As a result, Chalfen said, Harvard is unlikely to aid an individual hospital in need. "I don't think there's a money pool any place," he said.

But he added that he approved of Walsh's proposal.

"It's a great idea," said Chaflin. "We would welcome support from all quarters."