CHICAGO — Illinois’ new rules governing how much charity care and other community benefits not-for-profit hospitals must provide to keep their property tax exemptions is a positive for the sector’s credit health, Moody’s Investors Service said Wednesday.

Gov. Pat Quinn earlier this month signed a sweeping Medicaid restructuring that included legislation laying out what types of care count towards the charity care standard and how much must be provided for hospitals to preserve their tax-exempt perks on property and sales taxes.

The legislation ended an ongoing state crackdown to strip some hospitals of their exemptions for failing to provide sufficient free or discounted charity care. Rating agencies had warned that the crackdown threatened ratings, while investors were demanding a trading penalty on some credits due in part to the looming fiscal threat.

Under the new rules, all not-for-profit hospitals will be required to show that they provide sufficient qualified services at a level equal to or greater than their assessed property tax liability.

“The new standard is a credit positive for Illinois not-for-profit hospitals because it brings clarity to Illinois’ previously uncertain charity care standards and a degree of stability to a challenged sector,” Moody’s analysts wrote in the firm’s weekly credit outlook.

The state for a long time had limited the charity care definition to free or discounted care rendered to a patient at the time of service, and its stance was reinforced by a 2010 state Supreme Court ruling.

Hospital representatives pushed, and won, an expansive widening of the definition of charity care activities to cover community outreach and educational services, in-kind services, subsidized services, and the shortfall between the cost of providing a service and the amount compensated under Medicaid. The expanded definition will especially help hospitals with higher levels of Medicaid patients or ones that serve affluent areas.

“The expanded definition is a reasonable approach because it incorporates more of the community benefits that not-for-profit hospitals provide,” Moody’s wrote.

Resolution of the state crackdown eases one unknown as hospitals here are already grappling with thin operating margins, budget shortfalls, cuts in state reimbursements and payment delays.

Under the new law, all hospitals must now reapply for their property tax exemption, showing that they meet the standards. A hospital applicant can use either the value of its qualified activities for a single year or the average of the last three fiscal years.

The changes apply retroactively to pending application and renewals. More than 20 applications had been pending and many were concerned that they faced the loss or reduction in their exemption. Under the previous rules, hospitals were required to reapply under certain conditions such as a change in ownership or after completing a major construction project.

While some differences still exist between federal community rules that govern hospitals’ income tax exemptions and access to the tax-exempt bond market, the state’s expanded scope of standards “are now more closely aligned with those federal standards,” McDermott Will & Emery wrote in a report on the subject.

The law firm’s report also notes that hospitals potentially could face greater scrutiny and enforcement actions by the Illinois attorney general’s office and others “focused on the veracity and accuracy of the information contained in exemption applications and affidavits.”

The McDermott report also suggests that the “new Illinois law may become a model to be followed by other states.” The report is clickable here. 

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