The American Hospital Association (AHA) has written to John Koskinen, Commissioner of the Internal Revenue Service (IRS), and Mark Mazur, Assistant Secretary for Tax Policy at the Treasury Department, raising concerns about the position taken by the IRS in a recent IRS ruling that denied Internal Revenue Code Section 501(c)(3) tax-exempt status to an accountable care organization (ACO) that was not participating in the Medicare Shared Savings Program (MSSP) and that was contracting with third-party payers on behalf of physicians (including independent physicians not employed by the health system with which the ACO is affiliated). The IRS ruling stated that, unlike an ACO that participates in the MSSP, which promotes the charitable purpose of lessening the burdens of government, a commercial ACO that promotes another charitable purpose – the promotion of health – does not qualify for Section 501(c)(3) tax-exempt status because of the presence of a substantial non-charitable activity (i.e., the negotiation of payer agreements on behalf of healthcare provider participants in the ACO).
In its ruling, the IRS determined that although the ACO was organized to address the “Triple Aim” goals of the Affordable Care Act (reducing costs, improving patient access to and the quality of healthcare, and improving population health and patient experience), the ACO’s negotiation of payer agreements with private insurers on behalf of participating providers, including independent physicians and those employed at other hospitals, was a substantial part of the ACO’s activities. The IRS found those activities conferred an impermissible private benefit to participating providers, determining that the presence of a “single substantial nonexempt purpose” of the ACO precludes charitable tax-exempt status, regardless of the other tax-exempt activities it performs.
In response, the AHA letter highlighted how the IRS denial of tax-exempt status to this ACO is “the exact opposite of the result it would have received if it were an MSSP ACO,” and conflicts with the purported goals of HHS to build a health care system that delivers better care, spends health care dollars more wisely, and results in healthier people.
Recognizing that nonprofit hospitals and health systems have traditionally qualified as Section 501(c)(3) organizations based on their promotion of health for the benefit of communities they serve, AHA noted that the IRS focused only on the impermissible private benefit to physicians without assessing how the community benefits from the ACO through coordinated care and better management of health care costs. AHA suggested that a better test for ACOs would be that “the activities and programs have been structured to avoid giving private parties a profit-like interest and to make returns on investment proportional to the resources invested,” so that non-profit hospitals can be innovative in their relationships with other providers while maintaining tax-exempt status. AHA further remarked that the IRS’s distinctions between government-sponsored MSSP ACOs and privately organized ACOs ignores the important parallels between the two models by focusing only on the ultimate payment arrangement.
In the absence of more clarity, AHA highlighted how non-profit hospitals will be limited in their ability to use modern models and analytics to respond to current public health needs due to fear of losing their tax-exempt status by coordinating with other providers. AHA urged the IRS to publish guidance “affirming that hospitals may participate in ACOs without generating a tax cost or incurring a catastrophic loss of their tax-exempt status,” thereby allowing hospitals to further the charitable purpose of promoting health for the benefit of their communities.
IRS Private Letter Ruling 201615022 is available here, and AHA’s letter is available here.
Reporters, C’Reda Weeden, Washington, D.C., +1 202 626 5572, cweeden@kslaw.com, and Constance Fore Dotzenrod, Atlanta, +1 404 572 3585, cdotzenrod@kslaw.com
