I will admit to being a bit confused by the logic of the just-released Internal Revenue Service (IRS) ruling on an accountable care organization (ACO). On April 8, the IRS issued a ruling (see Internal Revenue Service Determination Letter Denying Tax-Exempt Status To Commercial ACO Not Participating In Medicare Shared Savings Program) that denied a tax exemption sought by an ACO that works for a commercial health plan. The reason was that the organization did not meet the test for tax-exempt status because it was not operated exclusively for charitable purposes and it provided private benefits to some doctors in its network (see I.R.S. Ruling Is Obstacle To Health Care Networks Promoted By Obama, in The New York Times). However, the ruling said that an ACO participating in Medicare could be tax-exempt because it advances “the charitable purpose of lessening the burdens of government.”
My confusion has less to do with ACOs specifically and more to do with other rulings on the tax-exempt status of health care organizations. Many of those previous rulings have held that “payment is payment” – whether from government or the private sector – and that the test of charitable purpose was in the amount of “free” service provided (see The Changing Landscape Of Bad Debt & Charity Care and PPACA & Tax-Exempt Status – More On The Horizon).
I asked my colleague Jamie Stewart, Chief Administrative Officer, Grafton Integrated Health Network and OPEN MINDS advisory board member, if the IRS rationale that there is a difference between Medicare and other ACO customers is on point. And, what are the implications of this for ACOs? He responded:
I understand what the entities believe, which is they are forming these cooperative organizations amongst providers and payers to meet the expectations of the Patient Protection and Affordable Care Act (PPACA). Basically, a population health model for a non-CMS population. But saying that, I understand where the IRS is coming from with their ruling as well. A 501(c)(3) exemption is specifically allotted to an entity with a “charitable purpose” and recently many states have held that standard in health care to be equal to a certain amount/load of charity care or percent of Medicaid/Medicare clientele served. I think it would be difficult for these ACO arrangements to meet anywhere near that level of charity care necessary. To be clear, charity care is not defined by the IRS as the difference between the amount charged and the amount reimbursed. It is defined as the cost of free care that is not reimbursed in any manner. I do not see how the ACOs plan to address charity care under that definition since they are not talking about the Medicaid or Medicare populations.
So, in short, I think an ACO created to specifically serve the Medicare and Medicaid populations would likely receive an IRS exemption and one that has significant penetration into that market, even if not exclusive to that market, may receive the 501(c)(3) designation. However, I do not think an ACO that is not designed to meet the needs of “people with employer-sponsored insurance” would meet the standard.
The grey area for me is the consumers who buy their coverage through the exchanges. We know that much of this population did not have coverage prior to the PPACA exchange creation, so could technically be an underserved or targeted population. It also could be defined as a Medicaid population in those states that have opted into the exchange in their Medicaid programs. I can see the IRS allowing an ACO arrangement that targets or has heavy penetration into this market due to the high-deductible plan design on these coverages which will likely lead to high write-offs/charity care amounts.
Also, many states now allow entities to form as a “Benefit Corporation.” Basically these are for-profit C corps, but are a mission-oriented corporation specifically created for the general public benefit. This arrangement still has a “profit motive” and is still expected to produce a financial return for shareholders, but making a profit does not need to be the exclusive concern. I would think the ACOs mentioned could form under those auspices.
While one ruling doesn’t make a trend, I think this ruling may cause more commercial ACOs to try to participate in the Medicare program. But there is the bigger question about how this ruling in particular, and IRS policy on tax-exempt status, fits with the evolution of the U.S. health care system. But as noted by legal institution, Jones Day, “the IRS seems unprepared to accept this new paradigm of population health management as an activity that necessarily promotes the health of a sufficiently broad segment of the community to satisfy the community benefit standard for exemption under section 501(c)(3)” (see IRS Denies Tax-Exempt Status to Non-MSSP ACO).
For more on ACOs, make sure to join me on June 9 at The 2016 OPEN MINDS Strategy & Innovation Institute for the session, “Taking Risks, Finding Rewards: The Ochsner Accountable Care Organization Strategy”, featuring Victoria McGhee Smith, M.D., Section Head for Primary Care-Kenner Region & Site Lead for St. Charles Parish Hospital, Ochsner Health System.