CHICAGO — Illinois Gov. Pat Quinn last week signed sweeping health care legislation that dramatically eases the Medicaid funding burden on state coffers while defusing a fiscal threat posed to not-for-profit hospitals over their charity care activities.
"One of our most important missions in Springfield this year was to save Medicaid from the brink of collapse," Quinn said in a statement announcing his signing of the package. "I applaud the members of our working group and of the General Assembly, who worked together in a bipartisan manner to tackle a grave crisis."
The $2.7 billion Medicaid restructuring relies on a mix of program and reimbursement cuts and revenue increases from a $1 hike in the state's cigarette tax and federal matching funds. It also promises to end in the coming years the state's practice of pushing off current-year Medicaid bills into the next fiscal year.
Quinn had pressed the General Assembly to tackle Medicaid and pension reforms during its spring session to help stabilize the state's fiscal foundation and stave off further downgrades. While pension reform floundered, the Medicaid restructuring received bipartisan support last month with the exception of the cigarette tax hike that some Republicans opposed.
Lawmakers inserted the clarification of the charity care standards just before their consideration of the cigarette tax increase, in a move pushed by hospital groups that warned a state crackdown on hospitals' property tax-exemption threatened the sector's fiscal health.
Market participants called the provisions a clear win for hospitals because they expand the types of activities that will count toward their "charity care" threshold. Some community groups believe the new rules let hospitals off too easy.
The Illinois Hospital Association, an influential lobbyist for the sector, endorsed the Medicaid package — after some tweaks — and pushed for inclusion of the charity care criteria.
"IHA and the hospital community look forward to continuing our partnership with the state, the administration and the General Assembly, working together to implement the critical details of the new laws and to meet the health care challenges that still lie ahead," IHA president Maryjane Wurth said in a statement Thursday.
SB 3261 outlines how much charity care nonprofit hospitals must dole out and what counts toward that threshold to preserve their property and sales tax exemptions.
The legislation broadens the definition of charity care to more closely mirror Internal Revenue Service rules that take into account a larger category of "community benefits." Illinois courts have limited the interpretation to cover only care that is provided at the time of service without the expectation of payment based on state statutes.
Benefits provided to low-income individuals, free and discounted hospital care for the indigent, support for health care programs or services for the indigent, subsidizing physicians treating low-income persons and disease management and prevention for low-income persons will now count, as will the difference between the cost of providing a Medicaid service and the state reimbursement.
The value of those charitable activities would have to equal or exceed the estimated value of a hospital's property tax exemption. Hospitals that meet the test would also continue to enjoy a sales tax exemption.
"This is a major victory for the IHA," said James Unland, president of Health Capital Group. "This by and large greatly reduces the amount of actual free medical care that must be provided." He said the new rules could face a legal challenge.
Quinn recently lifted a six-month moratorium on stripping hospitals of their property tax-exemptions for failing to provide sufficient free care. A long debate over whether nonprofits provide enough charity care escalated last August when the Illinois Department of Revenue moved to deny exemption applications for three hospitals for providing charity care equal to just 1% to 2% of their operating revenues.
The state was emboldened by a state Supreme Court decision in 2010 upholding the denial of a tax-exemption for a former Provena Health hospital. Hospitals must reapply for their exemptions under some circumstances, such as a change in ownership or major construction project.
Fitch Ratings in a report this month called the legislation a positive for the sector and said others across the country were watching.
"Fitch believes the legislation provides long overdue clarity as to what constitutes charity care," analysts said. "Fitch also believes the legislature's decision may be a precedent for reviewing this issue. As the recession fades and the slow recovery begins, we believe that this type of discussion could spread to other states."
The state's crackdown did not affect hospitals' federal nonprofit status that allows them to issue tax-exempt bonds.
Investor analysts have reported that Illinois hospitals suffer a trading differential due in part to perceived credit weakness over the charity care crackdown. Interactive Data Pricing and Reference Data reviewed some recent Illinois hospital trades and said it could not yet distinguish any impact of the legislation.
The IHA, in its annual charity care and community benefits report released in January, said Illinois' 109 nonprofit hospitals provided $4.6 billion in charity care and community benefits in 2010, up 26% in five years.