CHICAGO — The Illinois Senate passed legislation Tuesday raising the state’s cigarette tax by $1 as part of a $2.7 billion Medicaid reform package aimed at easing the program’s strain on state finances.

The Senate adopted the hike in SB 2194 by a margin of 37 to 21. The tax bill now heads to Gov. Pat Quinn’s desk following House approval in a 60-52 vote late last week. The cigarette tax hike that brings the state’s rate to $1.98 per pack is expected to generate about $350 million annually, which would leverage an equal amount in federal dollars.

The bill marks the final piece in a series of measures aimed at reducing Medicaid costs by $2.7 billion. The General Assembly last week gave final approval to $1.6 billion in cuts in SB 2840. Service reductions account for about $1.3 billion with cuts in state payments accounting for the remaining savings. Critics have warned that the cuts will prove devastating to health care services for the poor and uninsured. Supporters counter that the cuts are needed to save the system.

“I look forward to signing the bills to preserve and restructure our Medicaid system, as we continue to take important steps to restore fiscal stability to Illinois,” Quinn said in a statement Tuesday.

The tax bill also establishes charity care standards for the state’s nonprofit hospitals whose property tax exemptions have been threatened over their level of charity care services.

It also enhances the state’s hospital assessment program to leverage an additional $100 million, $50 million from hospitals and $50 million in matching federal funds by taxing non-public hospitals’ gross outpatient revenue. Only inpatient revenues are taxed under the existing assessment program created to leverage federal funds, said the bill’s sponsor, state Sen. Jeff Schoenberg, D-Evanston.

The state approved a funding shift to cover another $300 million in costs to make up the overall $2.7 billion package.

Approval of the Medicaid reforms mark a victory for Quinn, who has pressed lawmakers to overhaul the Medicaid and pension systems in an effort to ease budget pressures, preserve funding for core services, and stave further credit deterioration.

Standard & Poor’s has warned that a failure to act on the state’s $82.9 billion of unfunded pension liabilities, Medicaid and an $8-to-9 billion bill backlog 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.

The charity care provisions 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 nonprofits 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 the 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 over the charity care issue. A long debate over whether nonprofits provide enough 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 action followed a state Supreme Court decision upholding the department’s denial of another hospital’s exemption application.

Rating agency analysts have warned that the action poses added credit risks for the Illinois hospital sector, The state’s crackdown does not affect a hospital’s federal status that allows it to tap the tax-exempt bond market.

The Illinois Hospital Association participated in talks to set the standards and praised passage of the bill. “This legislation sets clear, fair and workable criteria that states which activities and services are sufficient for hospitals to qualify for tax exemption and how charitable care is determined,” said IHA president Maryjane Wurth. The group said it was too early to tell whether all hospitals would meet the threshold based on their current care levels.

The Democratic majority in the General Assembly is racing against the clock to adjourn by a Thursday deadline. Any bills not adopted by then require a three-fifths majority, making it more difficult to win passage.

A gambling expansion bill that has passed the House was set for a committee hearing Tuesday night. The House leadership unveiled a pension reform bill Tuesday and it passed out of committee. The chamber could take up the plan Wednesday. It includes some provisions proposed by Quinn, alters others, and drops some, such as raising the retirement age to 67. 

Lawmakers also have yet to adopt a $34 billion fiscal 2013 budget.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.