The IRS denied tax exemption earlier this month to an unnamed nonprofit health system's accountable care organization because it was formed with commercial payers, according to law firm Drinker Biddle.
The decision confirmed the IRS considers participation in CMS' Medicare Shared Savings Program as a key factor in determining an ACO's tax-exempt status, according to the Drinker Biddle analysis. MSSP ACOs are tax-exempt because they have the charitable purpose of lessening the financial burden on the government. While all ACOs generally aim to promote health, which could be considered a charitable purpose, not all activities that promote health are charitable, according to the IRS. Furthermore, ACOs do not directly provide healthcare services, and instead integrate and coordinate care.
The IRS decision also indicated ACOs with physicians that are not affiliated with the participating health system may not be tax-exempt, according to DrinkerBiddle. In the particular case at issue, roughly half of the physicians in the ACO were independent of the nonprofit health system. Through the lens of the IRS, ACO negotiation with private payers on behalf of unaffiliated, independent providers primarily benefits those physicians and only indirectly benefits the public, further solidifying its non-tax-exempt status.
The IRS determination is not just a concern for nonprofit health systems with commercial ACOs, Drinker Biddle advises. ACOs with a "dual purpose," or that have both MSSP and commercial contracts, may also be affected.
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