Update on Section 25 Liabilities: Roughly $3.6 Billion in Deferred Bills in FY2012

September 20, 2012 - 3:12pm

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Reflecting severe financial pressures, the State of Illinois pushed an estimated $3.6 billion of Medicaid and group health insurance bills from FY2012 into the current fiscal year.

The new estimate is based on documents filed in connection with the State’s bond offering on September 13, 2012. The $3.6 billion in deferred bills in FY2012 compares with $1.7 billion in FY2011.

As discussed here, a provision of Section 25 of the State Finance Act allows costs for Medicaid and group health insurance to be paid from future years’ appropriations. This provision, known as the Section 25 exception, has been used to help the State balance its budget by underfunding Medicaid and group health insurance. Meanwhile, bills from doctors and other healthcare providers pile up outside the budget. The deferred bills are known as Section 25 liabilities.

Bills accumulate because simply reducing appropriations for Medicaid and group health insurance does not reduce costs for these programs. Medicaid is an entitlement program under which certain categories of low-income people who meet eligibility requirements are entitled to specified medical services. Medicaid costs cannot be cut without reductions in program eligibility, benefits or reimbursement rates paid to healthcare providers. Group health insurance is a benefit provided to employees and retirees under State law, and a change in the law is required to reduce the benefit.

The following chart shows Section 25 liabilities of the State's general operating fund from FY2000 through FY2012. The data though FY2011 can be found on the Illinois Office of the Comptroller’s website. The estimate for FY2012 is based on the State’s bond documents, with the number provided for the Department of Healthcare and Family Services adjusted to cover only liabilities of the general operating fund.

As shown in the chart, Medicaid bills have represented most of the Section 25 liabilities of the general operating fund since FY2000. Medicaid Section 25 liabilities declined after FY2008 due to a requirement under the American Recovery and Reinvestment Act of 2009 (ARRA) that certain Medicaid vendors be paid within 30 days. As noted by the Comptroller’s Office, however, underfunding of the State group health insurance program increased during the same time period. ARRA eased pressures on the State budget by increasing federal reimbursement rates for Medicaid, but the enhanced reimbursement ended on June 30, 2011.

The sharp increase in deferred Medicaid bills in FY2012 reflects the underfunding of that year’s Medicaid budget. As discussed here, the State enacted legislation in June 2012 to close the Medicaid funding gap in FY2013, including program cuts, reimbursement rate reductions and a $1-a-pack increase in the cigarette tax.

Section 25 liabilities are not included in the State’s budget. They are in addition to an estimated $5.4 billion in FY2012 general operating fund bills that must be paid from FY2012 appropriations. In general, Section 25 requires that State bills from a given fiscal year must be paid with that same year’s appropriations. The State has a period after the end of the fiscal year, known as the lapse period, during which revenues from the next fiscal year may be used to pay this year’s bills. The lapse period usually lasts two months, but it was extended to six months—until December 31—for FY2010, FY2011 and FY2012 because of the large amount of unpaid bills.

Section 25 liabilities can be paid from the next year's appropriations. One part of the Medicaid legislation enacted in June significantly limits the State’s ability to defer Medicaid bills under the Section 25 exception. The new law limits Section 25 Medicaid liabilities to $700 million in FY2013 and $100 million thereafter, although the cap doesn't apply to bills incurred by June 30 but received after that date. The bill also extends the lapse period for Medicaid bills to six months from the normal two months. The new limits do not apply to group health insurance bills.

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