IRS Denies ACO Tax-Exempt Status
The IRS just released a letter ruling (PLR 201615022) denying Section 501(c)(3) tax-exempt status to an accountable care organization (ACO) formed by a Section 501(c)(3) health system, which ACO organized and operated a clinically integrated network of providers comprised of both the health system’s facilities and employed physicians as well as independent/unaffiliated practice groups. In denying exemption, the IRS focused on the following facts:
- The ACO did not participate in the Medicare Shared Savings Program (MSSP) (i.e., furthering the charitable purpose of lessening the burdens of government).
- The ACO was not primarily engaged in assisting Medicare/Medicaid populations (i.e., potentially furthering the charitable purposes of lessening the burdens of government and relieving the poor and distressed).
- The ACO was not established/managed by the government nor were the ACO’s activities subject to governmental oversight as would be the case under the MSSP.
- A substantial ACO activity involved negotiating agreements with commercial payors on behalf of participating providers, half of which providers were independent physicians not employed by the Section 501(c)(3) health system.
The IRS concluded that the ACO had a substantial nonexempt purpose (i.e., negotiating commercial ACO arrangements on behalf of independent providers) resulting in an impermissible private benefit to physicians not employed by the Section 501(c)(3) health system. The IRS reasoned that “[n]egotiating with private health insurers on behalf of unrelated healthcare providers is not a charitable activity … regardless of whether the agreement negotiated is a program aimed at achieving cost savings in health care delivery” noting that such activities provided planning information that could be used in such independent providers’ business operations.
The fact that the ACO developed and implemented various programs, performance measures, data infrastructure, a patient satisfaction survey tool and other infrastructure and arrangements designed to track and provide financial incentives/disincentives based on performance and quality measures was not sufficient to obtain Section 501(c)(3) exemption in and of itself. That said the IRS acknowledged that the ACO’s electronic health records activities (e.g., “an electronically integrated clinical information data warehouse”) may further Section 501(c)(3) charitable purposes but such activities could not rescue the exemption due to the presence of a substantial nonexempt purpose and impermissible private benefits. The IRS referenced The American Recovery and Reinvestment Act of 2009, which provides economic incentives encouraging use of health information technology, and further recognized that facilitating use of such technology consistent with HHS standards and other requirements could be considered a Section 501(c)(3) purpose (i.e., lessening the burdens of government).
Finally, the IRS further clarified that the ACO, which also sought supporting organization status under Section 509(a)(3), would not qualify as a supporting organization because the broad networking and contracting activities benefiting unaffiliated providers did not exclusively benefit the Section 501(c)(3) health system.
- This ruling reiterates the following IRS positions from IRS Notice 2011-20 and the IRS ACO Fact Sheet (October 20, 2011):
- ACOs participating in the MSSP will generally be deemed to “further the charitable purpose of lessening the burdens of government” with respect to such activities.
- Certain non-MSSP ACO activities may further a charitable purpose (e.g., serving Medicaid or indigent populations and relieving the poor/distressed/underprivileged), while other activities may not.
- An ACO exclusively conducting activities under the MSSP (i.e., generally deemed to be furthering charitable purposes) would qualify for tax-exemption under Section 501(c)(3) if other specified requirements (e.g., organizational requirements) relating to 501(c)(3) status are met.
- An ACO engaging in both MSSP and non-MSSP activities can qualify for tax-exemption under Section 501(c)(3) if it engages exclusively in activities that accomplish charitable purposes and if other specified requirements (e.g., organizational requirements) relating to 501(c)(3) status are met.
- ACOs engaging solely/primarily in commercial/non-governmental programs and including non-501(c)(3) providers would likely not be able to obtain tax-exempt status under Section 501(c)(3).
- ACOs comprised primarily of providers owned/employed by a Section 501(c)(3) health system might still be able to qualify for Section 501(c)(3) status even if the ACO negotiates/administers commercial programs.
- ACOs engaged primarily in governmental programs and/or programs serving the poor/distressed/underprivileged might still be able to qualify for Section 501(c)(3) status regardless of whether participants are affiliated with Section 501(c)(3) organizations.
- The IRS could take the position, based on this ruling, that income earned by a Section 501(c)(3) ACO (i.e., not necessarily income/incentives earned by participating providers) is not exempt function income and is potentially subject to unrelated business income tax to the extent such income is derived from negotiating/administering “non-charitable” programs (based on the standards above) that involve non-501(c)(3) participants.
- In the case of an ACO treated as a partnership for tax purposes that has one or more Section 501(c)(3) partners, ACO income allocated to such Section 501(c)(3) partners might be impacted similarly.
We are available to discuss in more detail and answer any questions you may have.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.