Last week, my OPEN MINDS colleagues Monica E. Oss and James Stewart took a look at a story with potentially large implications for health and human services – the denial of a tax exemption sought by an accountable care organization (ACO) that works for a commercial health plan (see The IRS Turns Its Attention To ACOs). The Internal Revenue Service (IRS) denying the tax exemption requested by a newly formed ACO is certainly cause for concern, or at least caution, depending on your focus as a provider.
I have read IRS Notice 2011-20 (see NOTICE 2011-20), and I understand their concern – they don’t want a group of for-profit health care organizations forming a tax-exempt ACO to negotiate rates with payers for their benefit. In denying the request, the IRS cited concerns that the ACO was not operating exclusively for charitable purposes, and that some private doctors were benefiting from the contract negotiations of the ACO.
While it may appear that the IRS is not in alignment with the goals of the Patient Protection and Affordable Care Act (PPACA), it’s important to look closely at the rationale used by the IRS to deny the exemption. The IRS based the decision on analysis done in NOTICE 2011-20, 2011‑16 I.R.B. 652 (April 18, 2011) – analysis that the IRS continues to use for guidance. The goal of the IRS is to ensure that tax exemption is reserved for those who meet the requirements of that status, specifically:
- The organization must operate exclusively for one or more exempt purposes identified in Treasury Regulation 501(c)(3).
- The organization cannot exist for, or result in, the creation of benefits to private individuals.
So what are some of the implications of this ruling? I see two important implications for executives watching this situation unfold. The first implication – the IRS does not consider the provision of health care alone an exempt purpose. We may sometimes forget that in order to be tax exempt, an organization’s services must bring relief to the poor, distressed or underprivileged, advance religion, education or science, or lessen the burden of government. Organizations often demonstrate community benefit by providing unreimbursed services or accepting Medicare and Medicaid rates that don’t cover the cost of services.
While the IRS agrees that ACO involvement in the Medicare shared savings program is an exempt purpose (because it lessens the burden of government), they have yet to view the overall ACO triple-aim goals of health care as a community benefit. Specifically, they say in Notice 2011-20, “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 health care delivery.”
However, the IRS has acknowledged that an organization can participate in Shared Savings Plan and non-Shared Savings Plan activities as long as it meets one or more charitable purposes and complies with 501(c)(3) requirements. But the lines are a bit blurred, so it’s important to demonstrate how ACO involvement supports the charitable purposes.
And the second implication is that the IRS is concerned about private individuals and organizations using a tax exempt ACO structure to their personal benefit. The IRS has established factors that it uses to determine when personal benefit occurs and the impact on related tax exempt organizations. Those factors need to be taken into account when structuring or joining an ACO.
This is an issue that extends beyond ACOs. In fact, for the many executives of provider organizations that are looking at tax-exempt affiliations to gain the scale needed to respond to opportunities for value-based reimbursement, this IRS ruling has big implications. The assumption that providing “health care” is a tax-exempt activity is not automatic – and it is essential that the affiliation design is clear about the beneficiaries of activities and proceeds.
For more, check out these resources from the OPEN MINDS Industry Library:
- Can You Defend Your Tax-Exempt Status?
- PPACA & Tax-Exempt Status – More On The Horizon
- Who Gets Your Charitable $$$? And How?
- Charity Care Vs. Community Benefit
- The Changing Landscape Of Bad Debt & Charity Care
- Charity Care Issues In An Era Of Expanded Health Care Coverage
And, check out our new resource from today’s 2016 OPEN MINDS Strategy & Innovation Institute pre-Institute seminar, Innovation, Diversification & Scalability: How To Develop A Profitable New Service In A Competitive Market, featuring OPEN MINDS senior associate Sharon Hicks and Dale Brickley, Ph.D., MBA, LPC, Senior Director of Innovation and New Service Development, Philhaven. For more on issues of strategy, don’t miss all of our live coverage on Twitter @openmindscircle – #OMInnovation from The 2016 OPEN MINDS Strategy & Innovation Institute this week.