ACO’s And Tax-Exempt Organizations

ACO’s And Tax-Exempt Organizations

The Centers for Medicare and Medicaid Services (“CMS”), through the issuance of Internal Revenue Service (“IRS”) Fact Sheet 2011-11, issued in October of 2011, released final regulations describing the rules for the Medicare Shared Savings Program (“MSSP”) and accountable care organizations (ACOs). This Fact Sheet provides additional information for tax-exempt organizations that may wish to participate in the MSSP through an ACO and confirms that Notice 2011-20 continues to reflect IRS expectations regarding the MSSP and ACOs. IRS Notice 2011-20, issued March 31, 2011, provides guidance to Internal Revenue Code §501(c)(3) tax-exempt organizations, such as tax-exempt hospitals and medical centers, participating in the MSSP through ACOs.

WHAT IS AN ACO AND THE MSSP?

As explained in IRS Fact Sheet 2011-11, the MSSP is a program established by the Patient Protection and Affordable Care Act that promotes accountability for care of Medicare beneficiaries, improves the coordination of Medicare fee-for-service items and services, and encourages investment in infrastructure and redesigned care processes for high quality and efficient service delivery. Under this program, groups of providers of services and suppliers that meet criteria specified by CMS may work together to manage and coordinate care for Medicare fee-for-service beneficiaries through an ACO. If an ACO meets quality performance standards and demonstrates that it has achieved savings against a benchmark established by CMS, it will be eligible to receive a payment from CMS equal to a portion of the total savings (Shared Savings). During the term of its initial agreement with CMS, an ACO may elect to participate in one of two tracks during its initial agreement with CMS. Under Track 1 (one-sided model), the ACO may share in savings but is not at risk for sharing losses. Under Track 2 (two-sided model), the ACO agrees to take on the risk of sharing in losses (Shared Losses) in exchange for a greater share in savings.

In addition, IRS Fact Sheet 2011-11 provides that an ACO must be a legal entity formed under applicable state, federal, or tribal law by one or more Medicare-enrolled healthcare service providers or suppliers that meet specified requirements. Congress established the MSSP to be conducted through ACOs in order to promote quality improvements and cost savings, thereby lessening the government’s burden associated with providing Medicare benefits.

PARTICIPATION IN AN ACO BY A TAX-EXEMPT ORGANIZATION

A tax-exempt organization, such as a hospital, may participate, with private parties, in the MSSP (or other similar program) through an ACO but must ensure that it continues to meet the IRS requirements for tax exemption in order to avoid any adverse tax consequences. Whether participation in an ACO will jeopardize the tax-exempt status of a hospital depends on general IRS rules and regulations applicable to charitable organizations and on all the facts and circumstances involved on a case by case basis. The participation of a tax-exempt hospital in the MSSP through an ACO must:

• Not result in its net earnings inuring to the benefit of private shareholders or individuals,
• Not result in its being operated for the benefit of private parties participating in the ACO, and
• Determine whether the participation of a tax-exempt hospital in an ACO and its share of the activities generating the MSSP payments are substantially related to the performance of its charitable purposes.

An IRC §501(c)(3) tax-exempt hospital and other tax-exempt healthcare organizations participation in an ACO may include:

• Membership in a non-profit corporation;
• Ownership of shares in a corporation;
• Ownership of an interest in a partnership or an LLC; and
• Contractual arrangements with the ACO and/or its other participants.

A successful ACO will provide higher quality care at a reduced cost and will require tax-exempt hospitals to consider various elements prior to formation. These key areas of concern that must be analyzed by tax-exempt hospitals prior to participation in an ACO include, but are not limited to, the following:

• CMS’ calculation of the shared savings,
• Cost v. benefit of participation in an ACO,
• Patient loyalty,
• Risk v. reward,
• Governance/leadership management structure, and
• Physician alignment and integration.

IRS NOTICE 2011-20

A tax-exempt hospital’s participation in the MSSP (or other similar program) through an ACO will not result in private inurement or private benefit if the following factors are met:

• The terms of the tax-exempt hospital’s participation in the MSSP through the ACO (including its share of MSSP payments or losses and expenses) are set forth in advance in a written agreement for at least three years with the Department of Health and Human Services, negotiated at arm’s length.
• CMS has accepted the ACO into and has not terminated the ACO from the MSSP.
• The tax-exempt hospital’s share of economic benefits derived from the ACO (including its share of MSSP payments) is proportional to the benefits or contributions the hospital provides to the ACO.
• The ownership interest received by the tax-exempt hospital, if any, is proportional and equal in value to its capital contributions to the ACO. All ACO returns of capital, allocation, and distributions are made in proportion to such ownership interest.
• The tax-exempt hospital’s share of the ACO’s losses (including its share of MSSP losses) does not exceed the share of ACO economic benefits to which the hospital is entitled.
• All contracts and transactions entered into by the tax-exempt hospital with the ACO and the ACO’s participants, and by the ACO with the ACO’s participants and any other parties, are at fair market value.

ACO’S AND UNRELATED BUSINESS INCOME (“UBI”)

The IRS has stated that a tax-exempt organization’s participation in and receipt of payments received from the MSSP through an ACO generally will be considered as a substantially related activity of the organization furthering its charitable purposes and lessening the burdens of government; thus the revenue is not subject to income tax as UBI. In addition, an ACO can conduct activities unrelated to the MSSP (e.g. negotiating with private health insurers on behalf of unrelated parties) without jeopardizing its tax-exempt status. However, the issue of whether or not the revenue generated being treated as UBI will depend based upon all of the relevant facts and circumstances involved. It appears that ACOs are the waive of the future in providing quality efficient healthcare. We recommend that your institution, if it has not done so already, review potential opportunities associated with the formation of or participation in an ACO.

A copy of the IRS Notice 2011-20 and Fact Sheet 2011-11 can be accessed at the healthcare services section of our Firm’s website.

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For more information on the topics discussed or services we can provide, please contact:
Scott Mariani, JD, Partner
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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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