CHICAGO — Moody’s Investors Service warned Thursday that Illinois’ crackdown on the property-tax exemptions of nonprofit hospitals over the amount of charity care they provide could pose a credit threat to the sector here.
“Levying property taxes would be credit negative because it places additional financial constraints on not-for-profit hospitals, requiring more expense reductions and process redesign,” said Moody’s analyst Carrie Sheffield, who authored the special report published Thursday. “It also further supports our negative outlook on the hospital sector.”
The Illinois Department of Revenue recently revoked three hospital applications and has an additional 20 reviews pending. The department will hold off on any further actions to strip nonprofit hospitals of their property tax exemption for failing to provide sufficient charity care as state officials and hospitals engage in talks aimed at legislation setting minimum charity thresholds.
The department in August moved to deny exemption applications for Northwestern Memorial’s Prentice Women’s Hospital, Edward Health Services Corp.’s Naperville hospital, and Decatur Memorial Hospital for failing to provide sufficient charity care. Moody’s rates the hospitals Aa2 and stable, A2 and positive, and A2 and negative, respectively. Charity provided by the three amounted to about 1 to 2 % of their revenues.
The action marked the first set of rulings on hospitals’ tax-exempt status for property tax purposes since the Illinois Supreme Court last year upheld the state’s rulings that a hospital operated by Provena Health did not provide enough charity care to warrant the exemption.
Gov. Pat Quinn last month asked the department to halt further enforcement actions as the Illinois Hospital Association showed a new inclination to engage in talks with the state, including Attorney General Lisa Madigan, over the issue.
Madigan had previously proposed legislation that would have set minimum levels for hospitals to retain their tax-exempt perks at the state level, but it stalled. The hospitals had previously resisted any legislative mandate. Recommended legislation is expected by March.
Bank of America Merrill Lynch municipal analysts, in a recent commentary on the subject of the crackdown, said the market perceives weakness in the Illinois sector with a trading differential between health care credits here and health care bonds as a whole.
In a review of trades of $1 million an up in the third quarter, analysts said they noticed general market health care bonds traded at an average spread of 170 basis points while Illinois health care bonds saw a 210 basis point spread.
The state-level perks include a property tax exemption and access to the tax-exempt market through the Illinois Finance Authority. The crackdown does not impact the hospitals’ status as a nonprofit with the ability to issue bonds with the interest being exempt from federal income taxes.
Hospitals have defended their level of charity and uncompensated care and community benefits. Moody’s said 109 hospitals reported they provided $1.1 billion in uncompensated services and $492 million in free or discounted care.
The state counters that hospitals are well-paid by most for their services like a private enterprise and should do more to help those who cannot afford health care services to warrant public perks.
The crackdown comes at a lousy time for hospitals, given ongoing economic pressures and the fiscal challenges posed by federal health care reforms. “This ambiguity creates additional uncertainty for hospital management during a tenuous economic recovery,” Sheffield said.
Moody’s rates 23 nonprofit hospitals in Illinois, of which 26% reported operating losses in 2010. Revenue growth declined to 4.3% in fiscal 2010 from 6.4% in fiscal 2009 and 8.5% in fiscal 2008.
Should hospitals be forced to pay property taxes, potential downgrades would be driven by the scale of the added liabilities compared to a hospital’s operating revenues and the impact on operating performance.
“Larger hospital systems are more able to absorb tax liabilities, but many smaller organizations are likely to face substantial financial repercussions,” Sheffield said.
Provena, a large system, did not suffer a downgrade of its Baa1 rating and stable outlook following the state’s action against one of its hospitals.