A little-noticed tax break for investor-owned hospitals that was tucked into a deal last spring aimed at saving the Illinois Medicaid program from collapse will cost the cash-strapped state at least $10 million a year in lost revenue, according to an analysis by the Associated Press.
Hospital industry officials say the tax credit recognizes the free care they provide to the uninsured. But some state officials were puzzled about how for-profit hospitals were able to land a major tax break in the intense closed-door negotiations at a time Springfield was grappling with a dire financial crisis.
"I think we were surprised that it survived," said Mike Klemens, the since-retired manager of policy and communication for the state Department of Revenue. "We couldn't imagine the Legislature would be enacting something that would reduce their income tax revenue. We were shut out of the talks at the end."
The AP's review looked at how the provision got into the largest piece of legislation that passed the General Assembly last spring and its financial impact, which wasn't made public at the time.
After extensive wheeling and dealing, Gov. Pat Quinn in June signed a package of $2.7 billion in cuts and tax increases he said was needed to save the state's bloated program for funding health care to the poor and disabled.
Thousands of working parents lost Medicaid coverage because of the cuts. Taxes on cigarettes went up. And hospitals faced tougher rules for when they must provide free care to poor patients who don't qualify for Medicaid.
The leader of an Illinois fiscal watchdog group called the Legislature's tax giveaway — without a public cost estimate — "unforgivable" and an example of how politics gets in the way of Illinois resolving its core problems.
"They can't afford to be giving away tax revenue at all" with an accumulated deficit of $8 billion, said Ralph Martire, executive director of the bipartisan Center for Tax and Budget Accountability. "When they've got a hole of that magnitude in their existing budget, they're giving a tax credit to certain investors. That's saying we'd rather spend that $10 million to subsidize the income of these mostly affluent investors than use that $10 million to pay for the core services we directly fund."
Highly involved in crafting the deal and seeing it through was A.J. Wilhelmi, who left the Illinois Senate in February to take a leadership post with IHA, the hospital lobbying group. His name is still listed as a legislative sponsor of the bill that included the tax break.
"It's good public policy to support the charitable activities of investor-owned hospitals. We want to encourage hospitals to continue to provide free and discounted care," Wilhelmi said in support of the tax credit.
Wilhelmi told the AP that the hospital association estimated the tax break would cost "up to $15 million a year," a number that was shared verbally during the negotiations but wasn't divulged to the public.
"It was certainly discussed in those meetings," Wilhelmi said. "Was this issue brought up in every session? I don't think that's the case."
Although some insiders knew about the $15 million a year estimate from the hospital group, there was never a request for an official analysis of the impact on the state budget, according to the Illinois Department of Revenue.
There are 28 investor-owned hospitals in Illinois today, most owned by health systems that operate nationally like Nashville-based Vanguard Health Systems. Vanguard will reap an estimated $5.5 million annually because of the tax break, according to the AP analysis.
A spokesman for the Quinn administration confirmed that $15 million was the high end of the hospital association's estimate. The figure was given without any documentation, said spokesman Mike Claffey.
The AP analysis was based on public records of property taxes and charity care. The law works like this: For-profit hospitals will be able to offset their Illinois income tax by the amount of their local property taxes, or the amount of free and discounted care they provide to the poor, whichever is less.
If that number is more than the hospital's income tax liability — and for many hospitals it will be — the hospital will be able to sell all or part of their tax credit to other businesses, according to the Department of Revenue. Hospitals also will be allowed to carry forward any excess credit and apply it to their tax liability for five tax years.
When Quinn signed the bill, he said he hoped it would result in more charity care. The tax credit, the governor hoped, would be an incentive for hospitals to do more for the poor.
Many of these hospitals already provide more charity care than they pay in property taxes, according to the AP analysis, although a few specialty hospitals report they provide none. Wilhelmi said the tax break possibly could motivate those hospitals to provide at least some free care.
A Tennessee-based hospital company will get the bulk of the tax credit.
Vanguard Health Systems Inc., which will reap an estimated $5.5 million annually in tax credits for its four Illinois hospitals, posted a profit of $57.3 million in fiscal 2012 after losses the previous two years, and its revenue rose 30 percent to nearly $6 billion, due partly to hospital acquisitions.
Sonja Vogel, a spokeswoman for Vanguard Health Chicago, sent AP an email statement that cited "significant challenges" investor-owned hospitals are facing in Illinois. She said the company had provided $6.45 million in charity care and paid more than $12 million in state and local taxes last year despite cuts in Medicaid and Medicare reimbursements and a state budget she called "unreliable."
Margaret Storey represents parents of medically fragile children who are fighting a $15 million reduction to part of the Medicaid program that helps them. Coincidentally that cut equals the hospital association's cost estimate for the tax credit.
"To know that tax credits were being given away at the same time these children's future with their families is being put at risk is just appalling," Storey said. "It makes you lose a little faith in your government when those kinds of deals get cut."