CHICAGO — The Illinois House approved a bill Friday that raises the cigarette tax by $1 and establishes charity care standards for the state's nonprofit hospitals in order to preserve their property tax exemption.

The bill, passed 60 to 52, now heads to the Senate, which will consider it as soon as Monday.

The cigarette tax hike represents a central piece of a $2.7 billion package to rein in skyrocketing Medicaid costs that are straining state coffers. Illinois would use the additional tax funds to leverage federal dollars for a total of $700 million in new revenue.

The cigarette tax bill, SB 2194, was taken up by the House one day after lawmakers approved $1.6 billion in cuts to the Medicaid system in SB 2840.

"We cannot afford to say no to the provisions" in the bill, said its sponsor, state Sen. Barbara Flynn Curie, D-Chicago. "It's a win for hospitals …. it's a win for the health of the state."

Final passage of the overall package would mark a victory for Gov. Pat Quinn, who unveiled pension and Medicaid reforms last month. He called on lawmakers to tackle both issues in an attempt to stabilize state finances.

"The status quo would have led to Medicaid's collapse, and I am pleased to see the General Assembly take strong action to put our Medicaid system and our state on the path to sound fiscal footing," Quinn, a Democrat, said in a statement after passage of the cuts.

Service reductions account for about $1.3 billion with cuts in state payments accounting for the remaining savings under the bill passed Thursday. Opponents worry that the cuts will have a devastating effect on health care for the poor.

While the Medicaid cuts received overwhelming bipartisan support in the Democratic-controlled General Assembly, the cigarette tax hike that would bring the state's rate to $1.98 is widely opposed by many, who want deeper cuts.

"It's a tough vote, but it's the right vote," said state Republican Rep. Jim Sacia. The 182-page bill was amended Friday with several key elements added. One alters the state's hospital assessment program to raise $100 million for Medicaid by leveraging additional federal funds.

The amendments also lay out new standards for determining how much charity care the state's nonprofit hospitals must dole out to maintain their tax-exempt benefits and what activities are counted toward that threshold.

The standards for not-for-profits would count towards a hospital's charity care activities any benefits provided to low-income individuals, free and discounted hospital care for the indigent, support for heath care programs or services for the indigent, subsidizing physicians treating low-income persons, disease management and prevention for low-income persons.

It would also count the shortfall between the cost of a service provided by a hospital to a Medicaid patient and the amount reimbursed by the state and financial or in-kind subsidies to state and local government health care programs.

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.

Quinn recently lifted a six-month moratorium on stripping hospitals of their property tax-exemptions for failing to provide sufficient charity 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.

Rating agency analysts warned that the action poses added credit risks for the Illinois hospital sector, and investors have said hospitals, especially lower-rated ones, face added interest costs. The state's crackdown does not affect a hospital's federal status that allows it to tap the tax-exempt bond market.

Republicans are also pushing a Medicaid-related bill that would limit to $700 million the amount of Medicaid bills Illinois could carry into fiscal 2013. That figure would fall to $100 million in fiscal 2014. The state is expected to carry a total of $8 billion to $9 billion of unpaid payments to contractors, schools, and health care providers into the next fiscal year. That bill was still pending before the House Friday afternoon.

Passage of the Medicaid package sets the stage for lawmakers to focus on a roughly $34 billion fiscal 2013 budget and pension reforms. Some lawmakers have predicted that lawmakers will push off reforms aimed at reducing the state's mammoth unfunded liabilities of $82.9 billion to a fall session.

Standard & Poor's has warned that a failure to act on pensions, Medicaid, and unpaid bills could result in a downgrade to Illinois' A-plus rating. S&P assigns a negative outlook. Moody's Investors Service rates the state's general obligation debt A2 with a stable outlook and Fitch Ratings assigns an A with a stable outlook.

In other action this week, the Illinois House passed a gambling expansion bill that allows for five new casinos, but Quinn criticized the package, making it likely he would veto the legislation if it makes it to his desk. Supporters contend it would raise $1.2 billion in upfront licensing fees and then more than $300 million in new annual revenue.

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