Illinois Medicaid-Bill Backlog Case Will Be Decided Friday

(Bloomberg) -- Illinois will find out Friday if its finances will take yet another hit when a judge rules whether the cash-strapped state needs to immediately pay down at least $2.8 billion of unpaid Medicaid bills.

During a status hearing in Chicago on Wednesday, U.S. District Judge Joan Lefkow said she’ll rule June 30, which is also the last day for Illinois leaders to pass a budget before the start of a new fiscal year. Lefkow ruled June 7 that Illinois isn’t meeting its Medicaid funding responsibilities and ordered both sides to hash out a way to hasten the payments. Since then, negotiations have failed, according to a court filing from lawyers for the Medicaid recipients who asked Lefkow to order Illinois to pay $1.1 billion a month to catch up on new and old bills.

“Anyone who cares about the state’s financial future and anyone who’s looking to encourage the state to have what 49 states have -- which is an annual budget -- are looking for direction from Judge Lefkow,” Laurence Msall, president of the Civic Federation, a Chicago nonprofit that tracks state and municipal finance, said before Wednesday’s hearing. “It’s very significant.”

Illinois is on the brink of starting its third straight fiscal year without a spending plan. Without a budget by July 1, S&P Global Ratings has warned that Illinois will probably lose its investment-grade status, making it the first junk-rated U.S. state on record. If the court boosts the amount of prioritized payments for cash-strapped Illinois, that’s also grounds for a downgrade, according to S&P and Moody’s Investors Service. Both already rank Illinois at the lowest investment-grade level.

At issue is whether Illinois must give higher priority to the $300 million its Medicaid program pays hospitals, doctors and clinics each month. Because Governor Bruce Rauner and the Democrat-run legislature haven’t been able to agree on a spending plan for two years, the state has a record $15 billion of unpaid bills, prompting a lawsuit from Medicaid recipients who argue the impasse puts their health care at risk.

Spreads on Illinois’s 10-year bonds are already the widest of all 22 states tracked by Bloomberg. The state’s 10-year bonds yield 4.6 percent, 2.8 percentage points more than those on top-rated debt. The gap touched 3.4 percent, the highest since at least January 2013, on June 8, the day after Lefkow’s ruling.

“You have everything coming to a head,” said John Humphrey, the Chicago-based head of credit research for Gurtin Municipal Bond Management, which oversees about $10.1 billion of state and local debt. “If you have an adverse ruling in the absence of a budget, it’s going to impair certain core services.”

Not Enough To Go Around

Until a budget is enacted, the state should pay $586 million a month to Medicaid providers to keep the backlog from increasing, and an additional $500 million a month for four months to lessen the backlog, lawyers for the Medicaid recipients said in court filings this week. The actual burden on the state would be closer to $543 million a month because of federal matching, the filing said.

In response, lawyers for the state said in their own filing that the Comptroller offered to try to come up with $75 million more a month in negotiations with plaintiffs after Lefkow’s ruling, but that the plaintiffs refused that offer and are now demanding "100 percent" of the backlog.

A lawyer for the state attorney general said in a filing that should the court find for the plaintiffs, the state could not make "the monthly $593 million in statutorily mandated pension payments" but would also need to cut another $107 million from other core obligations. A sworn statement from the state’s assistant comptroller, Kevin Schoeben, verified that claim.

In the filing, the defense also said that the plaintiffs have failed to identify individual patients who have been harmed.

While the Medicaid case is important, investors are focused on whether a budget agreement will come together before month’s end, said Dan Solender, head of municipals in Jersey City, New Jersey, for Lord Abbett & Co., which manages $20 billion of the debt.

“Everything from a credit perspective is trending negative,” Solender said. “There’s no real trigger for them to tighten at this point.”

To contact the reporters on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net, Janan Hanna in Chicago at jhanna31@bloomberg.net.

To contact the editors responsible for this story: Christopher Maloney at cmaloney16@bloomberg.net, William Selway