On the same day CMS issued its proposed rule on accountable care organizations, the Internal Revenue Service issued a notice (2011-20) that it is considering extending provisions of the Internal Revenue Code governing tax-exempt organizations to accountable care organizations participating in the Medicare Shared Savings Program. This decision was not necessarily unexpected but came as positive news for current tax-exempt organizations, such as hospitals, that plan to also operate as or participate in ACOs, through joint ventures or other arrangements.
1. Relief of governmental burden
The notice suggests that the IRS intends to extend tax-exempt status to ACO-related activities for organizations participating in the MSSP through an ACO, given the ACO meets certain organizational and operational requirements of the MSSP. However, it interestingly replaces the "community benefit test" used to determine if hospitals and other healthcare providers are indeed operated for charitable purposes with a "relief of governmental burden test," says Milton Cerny, JD, an attorney with McGuireWood's Washington, D.C., office and the former technical advisor to the Assistant Commissioner on Employee Benefits and Tax Exempt Organizations for the National Office of the IRS. The relief of governmental burden is relevant because by reviewing and quality of services provided under Medicare, ACOs will take on a burden of the federal government.
2. Private benefit concerns
Like all other 501(c)(3) organizations, tax-exempt ACOs will have to ensure no private benefit or inurement to individuals or private parties occurs, such as excess benefits in the form of unreasonable compensation or other payment above fair market value, says Mr. Cerny. Additionally, tax-exempt organizations, such as hospitals, that participate in joint-venture/LLC ACOs (where profits and losses are passed through each member organization's tax returns) will also need to ensure that their ACO does not create private benefit, because the existence of private benefit could put the tax-exempt status of hospital at risk.
Fortunately for tax-exempt hospitals, the IRS expects that participation in the MSSP will ensure no private benefit occurs as long as:
"Because CMS has such strict requirements governing MSSP participation, the IRS has essentially said that if an organization can meet what CMS has established to participate, doing so will forestall any claim of private benefit or inurement," says Mr. Cerny.
As such, he recommends hospitals and others establishing an ACO that plan to participate in the MSSP should seek exemption for the ACO under section 501 (c)(3).
3. Commercial ACOs subject to UBIT
While the IRS notice suggests that revenue associated with Medicare ACOs will be eligible for exemption, ACOs and the organizations that participate in them may be subject to unrelated business tax income if the ACO services commercially insured patients.
Commercial ACOs do not pass the relief of governmental burden test, and while commercial ACOs may promote health, the notice states "not every activity that promotes health is considered to be a charitable purpose under § 501(c)(3)." Further, the notice later states, "negotiating with private health insurers on behalf of unrelated parties generally is not a charitable activity, regardless of whether the agreement negotiated involves a program aimed at achieving cost savings in healthcare delivery. However, the IRS recognizes that certain non-MSSP activities may further or be substantially related to an exempt purpose.
The IRS has specifically requested comment on how tax-exempt organization's participation in non-MSSP activities through the ACO may further tax-exempt purposes, and future guidance on this issue is expected. Comments will be accepted until May 31.
View IRS Notice 2011-20.
Related articles on ACOs:
6 Points on Creating ACO Contracts for Physicians
ACOs Could be Stymied By Data Problems, NCQA Head Says
1. Relief of governmental burden
The notice suggests that the IRS intends to extend tax-exempt status to ACO-related activities for organizations participating in the MSSP through an ACO, given the ACO meets certain organizational and operational requirements of the MSSP. However, it interestingly replaces the "community benefit test" used to determine if hospitals and other healthcare providers are indeed operated for charitable purposes with a "relief of governmental burden test," says Milton Cerny, JD, an attorney with McGuireWood's Washington, D.C., office and the former technical advisor to the Assistant Commissioner on Employee Benefits and Tax Exempt Organizations for the National Office of the IRS. The relief of governmental burden is relevant because by reviewing and quality of services provided under Medicare, ACOs will take on a burden of the federal government.
2. Private benefit concerns
Like all other 501(c)(3) organizations, tax-exempt ACOs will have to ensure no private benefit or inurement to individuals or private parties occurs, such as excess benefits in the form of unreasonable compensation or other payment above fair market value, says Mr. Cerny. Additionally, tax-exempt organizations, such as hospitals, that participate in joint-venture/LLC ACOs (where profits and losses are passed through each member organization's tax returns) will also need to ensure that their ACO does not create private benefit, because the existence of private benefit could put the tax-exempt status of hospital at risk.
Fortunately for tax-exempt hospitals, the IRS expects that participation in the MSSP will ensure no private benefit occurs as long as:
- Each organization's participation in the MSSP through the ACO (including each tax-exempt organization's share of payment or losses) is based on arms-length negotiations set forth in writing.
- CMS has not terminated the ACO from the MSSP.
- Within the ACO, each participating organization's economic benefit (such as its share of MMSP payments) it receives from the ACO must be proportional to its contributions to the ACO. Examples of such contributions may include upfront costs to establish the ACO, payments made into escrow, the purchase of electronic health records and other equipment and/or facilities and other operating costs, says Mr. Cerny. If the organization is has an ownership share in the ACO, its ownership stake must be proportional to its capital contributions.
- Each organization's share of ACO losses doesn't exceed its economic benefits.
- All transactions surrounding the ACO are at fair market value.
"Because CMS has such strict requirements governing MSSP participation, the IRS has essentially said that if an organization can meet what CMS has established to participate, doing so will forestall any claim of private benefit or inurement," says Mr. Cerny.
As such, he recommends hospitals and others establishing an ACO that plan to participate in the MSSP should seek exemption for the ACO under section 501 (c)(3).
3. Commercial ACOs subject to UBIT
While the IRS notice suggests that revenue associated with Medicare ACOs will be eligible for exemption, ACOs and the organizations that participate in them may be subject to unrelated business tax income if the ACO services commercially insured patients.
Commercial ACOs do not pass the relief of governmental burden test, and while commercial ACOs may promote health, the notice states "not every activity that promotes health is considered to be a charitable purpose under § 501(c)(3)." Further, the notice later states, "negotiating with private health insurers on behalf of unrelated parties generally is not a charitable activity, regardless of whether the agreement negotiated involves a program aimed at achieving cost savings in healthcare delivery. However, the IRS recognizes that certain non-MSSP activities may further or be substantially related to an exempt purpose.
The IRS has specifically requested comment on how tax-exempt organization's participation in non-MSSP activities through the ACO may further tax-exempt purposes, and future guidance on this issue is expected. Comments will be accepted until May 31.
View IRS Notice 2011-20.
Related articles on ACOs:
6 Points on Creating ACO Contracts for Physicians
ACOs Could be Stymied By Data Problems, NCQA Head Says