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Illinois Ordered to Negotiate Over $2 Billion Medicaid Debt

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(Bloomberg) — A federal judge ordered Illinois to negotiate how to pay down a Medicaid debt of about $2 billion to health care organizations, delaying an accelerated squeeze on the gridlocked state’s shaky finances.

(Related: Illinois Cut Near Junk by S&P, Lowest Ever for a US State)

U.S. District Judge Joan Lefkow in Chicago ruled Wednesday that the state isn’t meeting its Medicaid funding responsibilities and is violating previous court rulings to accelerate payments. But she stopped short of ordering the state to immediately pay the full amount it owes, instead directing both sides to keep talking to try to reach a compromise. If they can’t work out an agreement, either side can return to court on June 20 for further proceedings, she said.

Lawyers for the Medicaid recipients “have represented that they do not at this time demand or seek immediate payment in full,” Lefkow wrote. They contend that payments to the managed-care organizations “must be sufficient to sustain the services to members of the classes. This is a reasonable position.”

The case stems from Illinois’s inability to pay all its bills on time during its unprecedented budget impasse. At issue is whether Illinois must give higher priority to the $300 million its Medicaid program pays hospitals, doctors and clinics each month. Because Gov. Bruce Rauner and lawmakers can’t agree on a spending plan, the state has built up a record $14.9 billion backlog of unpaid bills, prompting a lawsuit from Medicaid recipients who argue the deadlock puts their health care at risk.

Political Gridlock

The political gridlock has left Illinois on the verge of becoming the first U.S. state ever cut to junk. Without a budget, the state has continued to spend more than it brings in. That’s forced it to cover “core priority” payments first, including payroll, debt service and pensions that total about $1.85 billion a month. While those bills include some Medicaid-covered payments for children and adults, the state has said there isn’t enough money general payments to managed-care organizations.

Despite the warnings by S&P Global Ratings and Moody’s Investors Service that they may pull the state’s investment-grade rating, Illinois hasn’t missed any bond payments and state law requires it to continue making monthly deposits to its debt-service funds.

“Everyone around here recognizes how sacrosanct those” debt payments are, Abdon Pallasch, a spokesman for Comptroller Susana Mendoza, a Democrat, said in an interview earlier this week. “People are still buying Illinois bonds. They buy them because by state statute we set aside money each month to make those bond payments, and no one here is looking to change that policy.”

Lefkow noted that while Illinois continues to fund its payroll and debt service at 100 percent, in spite of a two-year budget impasse, the state is paying only $160 million a month in Medicaid payments. Mendoza hasn’t come up with a lawful reason to disregard previous court orders to accelerate payments, the judge said.

‘No Disrespect’

“Although the court means no disrespect to the comptroller, who faces an unenviable situation, it finds that minimally funding the obligations of the decrees while fully funding other obligations fails to comply not only with the consent decrees, but also with the court’s previous orders,” Lefkow wrote.

The political standoff shows no signs of ending. The Democrat-controlled legislature and Republican governor failed to reach an agreement on a spending plan during the regular legislative session. Now lawmakers need a three-fifths majority to approve a plan before the start of the new fiscal year on July 1.

Both Moody’s and S&P warned last week that if a court ruling increased the amount of payments that are legally prioritized, that could lead to another downgrade.

“This ruling reaffirms the importance of Medicaid to more than 3 million Illinois residents, the majority of whom are children, elderly, disabled, or members of low-wage working households, who rely on this program for essential medical care,” Thomas Yates, executive director for Legal Council for Health Justice, said in an e-mailed statement.

Mendoza said her office’s lawyers will keep talking with the attorneys for the Medicaid recipients, adding that a real fix is a comprehensive budget.

“The lack of a budget for the last two years has created a situation in which we now have more court-ordered and state-mandated payments than we have revenues to cover them,” Mendoza said in an e-mailed statement after the judge’s ruling.

David Chizewer, one of the attorneys for the Medicaid recipients, said it isn’t realistic to make the state come up with all that is owed, while declining to say what the appropriate monthly payment is.

“I’m certainly optimistic that we will be able to negotiate a resolution.”

The case is Memisovski v. Wright, 92-cv-01982, U.S. District Court, Northern District of Illinois (Chicago).

— Check out Don’t Mess Around With Government Pensions on ThinkAdvisor.