CHICAGO -- The Illinois Health Facilities Authority plans to sell $100 million of taxable commercial paper backed by a pool of Medicaid receivables from hospitals and nursing homes in the state.

The program is the first commercial paper deal to use Medicaid receivables in a pooled approach that does not rely on the creditworthiness of individual pool members. Instead, the program uses the state's pledge and other credit enhancements to provide security for the paper, said John Dailey, chairman of the health authority.

The authority plans to sell about $50 million of the commercial paper in early December in a deal managed by Lehman Brothers and Kemper Securities Group.

Mr. Dailey said the program, which was approved by the authority's board last Thursday, was set up to get money immediately into the hands of Medicaid providers in the state. Providers are able to sell their receivables at a discount to the authority, which would pay the providers with the proceeds from the sale of the receivable-backed commercial paper.

The program was created because currently Illinois takes 100 days to pay its Medicaid receivables, causing nursing homes and hospitals to scramble until they finally get the money owed to them.

William Kempiners, executive director of the Illinois Health Care Association, which represents nursing homes, said, "Some homes can't meet their payrolls. There's a lot of stress out there."

According to Dean Schott, a spokesman for the Illinois Department of Public Aid, the state fell behind in its payments because of a backlog of fiscal 1991 Medicaid bills and unexpected weakness in state revenues.

As of last week, the department had about $700 million of unpaid Medicaid bills. Meanwhile, the state comptroller's office reported that at the end of October the general revenue fund had a balance of $153,000, the lowest in the state's recorded history.

Mr. Dalley said many hospitals and nursing homes have not been able to get traditional bank loans because of the current credit crunch. The commercial paper market, on the other hand, is cheaper than bank loans for providers and cheaper than issuing variable-rate bonds or notes for the authority, he added.

In addition, federal and state restrictions regarding the leveraging of Medicaid receivables prohibits providers from using the state's IOU to get money. This so-called factoring problem was solved when the Illinois General Assembly passed legislation last spring allowing Medicaid providers to sell their receivables to the authority.

Because the authority is a state agency and is not buying the receivables to make a profit, no factoring is involved, Mr. Dalley said.

The authority, which is just beginning the marketing of the program to Medicaid providers, expects the participation of 200 to 250 of the state's 1,200 eligible nonprofit hospitals, nursing homes, and other facilities, as well as for-profit nursing homes that provide Medicaid services.

Those participants will not receive the full amount owed them by the state. The discount on the receivable will take into account the cost of the borrowing, plus a cushion against how much time it will take the state to pay the receivable.

Mr. Dalley said that cushion will be 150% of the life expectancy of the receivable. For example, if it takes the state 120 days to pay Medicaid receivables, the discount would factor in 180 days. He estimated the discount on the receivables to be 4% to 5%.

Mr. Dalley said the deal was structured to make the paper more marketable by "homogenizing" the credit, rather than looking to the credit of each provider participating in the deal. That was done by pooling what are called adjudicated Medicaid receivables, or bills that have gone through the state's billing process and have been certified as payable.

Because most of the providers that are expected to participate in the program may not be considered good credits by the market because of their large Medicaid caseloads, the program pools the receivables under the umbrella of the state's general obligation pledge to ultimately pay its bills.

However, Arnold Kanter, chief counsel to Gov. Jim Edgar, said that pledge does not mean the issue constitutes new state debt.

"The general obligation of the state to pay the debt to the provider is separate from state debt," he said. "This will not impact the state's debt."

While the state issued $185 million of short-term GO certificates in August, the administration has been reluctant to do more borrowing despite the fact state Comptroller Dawn Clark Netsch has said more borrowing was needed to pay the backlog of Medicaid and other bills.

The commercial paper will be insured by Capital Guaranty Insurance Co., with the added enhancement of a letter of credit from the Sumitomo Bank for liquidity purposes.

"The paper buyer is looking at the credit of Sumitomo Bank and Capital Guaranty, backed up by the security of the state," Mr. Dailey explained.

In addition, the authority is also supplying its own $5 million letter of credit to provide extra security in case the state's payment cycle becomes longer than expected or if one of the participants goes bankrupt, causing a delay in when the authority would receive payment for the bankrupt provider's receivable.

Mr. Dailey said that additional layer should give potential buyers of the paper even more confidence the state will pay its bills because the authority, through its letter of credit from LaSalle National Bank, would "step up and take the first hit."

"From the standpoint of security, it's a risk-free transaction or as close to one as you can get in this world," said John Glennon, a managing director at Lehman Brothers.

Mr. Glennon said the paper would be sold to institutional buyers, such as funds and insurance companies. He said that, of the first $50 million issue, 50% would probably be sold as 30-day paper with the remaining 50% split between 60- and 90-day paper.

Mr. Dailey said that while the maturity of the paper will not be matched to the expected payment time of the receivables, the authority would be able to continuously enter the market or roll the paper over to meet its needs.

A rating from Standard & Poor's Corp. is pending. Mr. Glennon said the rating would be based on Capital Guaranty, which currently has a AAA rating from the agency. Officials from the agency declined to comment on the deal.

Mr. Dailey said the commercial paper program will run through December 1994. Commercial paper issuance beyond the initial $100 million of authorization would need board approval.

Once the program has established itself in the market, Mr. Dailey said future deals may be sold with fewer layers of enhancement.

He added that Illinois's commercial paper program may have some application in other states such as Michigan, Ohio, Massachusetts, New Jersey, and Pennsylvania that pay out a lot in Medicaid and that may be experiencing cash flow problems due to the recession.

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