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The IRS Speaks—No Tax Exemption for Non-Medicare ACO

on Monday, 20 June 2016 in Health Law Alert: Erin E. Busch, Editor

Since the passage of the Affordable Care Act in 2010, many ACO organizations have been established by hospitals and health systems to meet the triple aim of the statute—lower cost for individuals, improving access and quality, and improving population health. Their participating providers consist both of health system-employed physicians and independent community physicians. Some such ACOs do not participate in the Medicare Shared Savings Program (or are “getting their feet wet” with self-insured plans and other payors before taking the leap to Medicare SSP). The structure of such ACO organizations vary, but the open question was whether such ACO organizations qualify for federal income tax exemption.

On April 18, 2016, the IRS denied tax exemption for such an ACO. The denial involved a fairly typical ACO formed by a health system. Its goals were consistent with those of the ACA and its Triple Aim goals. Network participants included both physicians employed by the health system as well as those in independent practice groups. The ACO intended to be clinically integrated with processes to integrate, coordinate, and foster accountability for patient care, but it was not currently in the Medicare SSP.

In denying tax exemption for the ACO, the IRS held as follows:

  1. Such ACOs lack the charitable purpose of lessening the burdens of government, since non-Medicare SSP activities are not the burden of government.
  2. The Triple Aim goals of the ACO are not themselves charitable goals within the meaning of the Tax Code.
  3. Negotiating payer contracts on behalf of independent community physicians is not a charitable activity regardless of whether or not it is intended to reduce health care costs or improve quality.
  4. Negotiation of payer contracts on behalf of independent community physicians results in a substantial private benefit to those physicians, which is inconsistent with tax exemption.

It is not known whether the ACO plans to challenge the denial through the IRS appeals process.

The ruling leaves several unanswered questions.

  • Will an ACO that participates in the Medicare SSP but that also has substantial contractual relationships with commercial payors be eligible for exemption?
  • Does the inclusion of independent community physicians preclude exemption even for an ACO that participates in the Medicare SSP—due to the potential private benefit to the independent community physicians?
  • Does a hospital’s or health system’s participation in such an ACO (including its funding) jeopardize its tax exempt status—again due to the potential private benefit to independent community physicians?
  • Do the non-MSSP activities of the ACO generate unrelated business income or impact use of facilities financed with tax-exempt bonds?
  • Are there changes in structure or operation of the ACO that could have resolved the IRS concerns?

The American Hospital Association has responded to the ruling by sending a letter on May 16, 2016 to the IRS seeking guidance to clarify that a hospital’s or health system’s participation in such an ACO will not jeopardize its exemption, and particularly that such an ACO is still operating for the benefit of the community even though it includes independent community physicians.

We are hopeful that there will be further guidance in the near future on these important issues.

John R. Holdenried

1700 Farnam Street | Suite 1500 | Omaha, NE 68102 | 402.344.0500