Chicago - The Illinois Development Finance Authority is preparing a tax-exempt commercial paper program that will be backed by pooled state Medicaid receivables held by pharmacies.

The program will resemble a commercial paper program undertaken by the Illinois Health Facilities Authority earlier this year. But in that program, the commercial paper was taxable and backed by state Medicaid receivables held by hospitals and nursing homes.

Both programs were spurred by Illinois' financial problems, which have led to delays of 100 days or more in paying Medicaid bills. Through the sale of commercial paper, Medicaid providers are able to get their state-owed money immediately instead of waiting for the state to pay its bills.

Ron Bean, executive director of the development finance authority, said the agency received preliminary approval for the program from its board earlier this month and will seek final approval for a total of $350 million of commercial paper issuance from the board at its Aug. 19 meeting.

If approved, Mr. Bean said the authority would sell its first phase of commercial paper sometime after Sept. 7 in a deal headed by Goldman, Sachs & Co. and Dallas-based Municipal Capital Markets Group Inc.

The development finance authority's paper will be sold on a tax-exempt basis, even though most of the program's participants will be for-profit pharmacies.

Lynn Leland Coe, an attorney with Chapman & Cutler, who was the bond counsel for the health facilities authority issue, said that deal was done on a taxable basis because some of the participants were for-profit nursing homes and because of tax law concerns over the accumulated cash-flow deficits of the participants.

He added that he did not know on what basis the development finance authority's issue would be tax-exempt.

"More power to them if they figured out a way to go tax-exempt," Mr. Coe said.

Barry Nekritz, a partner at Altheimer & Gray, bond counsel for the development finance authority's issue, said the issue was tax-exempt because it was only "satisfying the state's payment of an obligation."

"For tax purposes, the proceeds of the paper are used by the state and not in the trades of businesses of the [Medicaid] providers," he said.

He said and important reason for the tax difference is that the authority will buy the receivables from the pharmacies without any element of recourse against the participants.

Mr. Coe said the health facilities authority issue was also structured as a purchase of receivables. He added that the issue had a recourse provision that required participating nursing homes and hospitals to repurchase the receivables if they had not been paid by a particular date by the state.

Mr. Nekritz said he had not "studied" the health facilities authority issue in terms of the taxability question, adding that other tax and bond attorneys involved in the development finance authority's issue have agreed that deal can be sold tax-exempt.

Mr. Bean, whose agency has been working on structuring the issue since last fall, said the fact the program is tax-exempt will make it more favorable to participants due to the lower interest costs.

Stuart Fuchs, a vice president in public finance at Goldman Sachs, said the key to the program is the ability to "bundle" the receivables held by the pharmacies and use the state's obligation to pay off the debt as the security.

"The state is not taking on additional indebtedness or contractual obligation," he pointed out. "Instead of paying the pharmacies, the state pays the authority. The state's position doesn't change one iota."

Under the development finance authority's program, only adjudicated receivables - bills that have been certified as payable by the state - will be eligible for inclusion in order to "de-emphasize" the individual pharmacies in the deal, Mr. Fuchs said.

He added that most of the participants in the program will be "mom and pop pharmacies."

Last year, Gov. Jim Edgar signed into law legislation enabling Medicaid providers to sell their state receivables to the two authorities. The legislation was important because of federal and state restrictions that prohibit Medicaid providers from leveraging their state IOUs for money. Because the receivables are sold to state agencies that are not buying them to make a profit, the programs avoid this so-called factoring problem.

Mr. Fuchs said the proceeds from the commercial paper sale will be turned over to the participating pharmacies at a discount of three to five cents on the dollar in order to pay for issuance costs and interest expenses.

Mr. Bean said the authority was seeking a bank letter of credit for liquidity purposes for the commercial paper issue. He added that the use of $3 million from the authority's credit enhancement fund to provide an interest reserve back up to the letter of credit, should it be drawn upon.

The authority is currently holding seminars to explain the program to pharmacy owners, according to James Flanigan, director of communications for the Illinois Pharmacists Association. He said pharmacies are currently waiting 100 to 120 days to receive Medicaid payments from Illinois. He added that delays in payments to pharmacies, which have been happening since November 1990, have contributed to a 300% to 400% jump in the number of pharmacies that have closed from March 1991 to March 1992.

Mr. Flanigan said pharmacies that have exhausted normal credit sources, such as bank loans, would likely participate in the commercial paper program.

"If the state paid its bills, there wouldn't be a need for a program like this," he added.

Mary McInerney, executive director of the health facilities authority, said her agency sold $350 million of the commercial paper in January. She added that the authority would tap its remaining $50 million authorization for issuing commercial paper if there is further demand for the program from nursing homes and hospitals.

The authority's program was the first commercial paper issue backed by Medicaid receivables in a pooled approach that used as security the state's pledge to pay its bills and other credit enhancements instead of relying on the creditworthiness of individual pool members.

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