On October 24, 2014, the IRS issued Announcement 2014-67, which “amplifies” Rev. Proc. 97-13 regarding certain management contracts that do not result in private business use.
Prior to this Announcement, Rev. Proc. 97-13 provided that a per-unit fee arrangement must not exceed three years and must be terminable, without penalty or cause, at the end of the second year of the contract term to be a “permissible arrangement.” Different contract terms were permissible for 50 percent periodic fixed fee arrangements and percentage of revenue or expense fee arrangements.
The Announcement adds a new and very broad category of permissible arrangements:
(7) Arrangements in certain 5-year contracts. All of the compensation for services is based on a stated amount; periodic fixed fee; a capitation fee; a per-unit fee; or a combination of the preceding. The compensation for services also may include a percentage of gross revenues, adjusted gross revenues, or expenses of the facility (but not both revenues and expenses). The term of the contract, including all renewal options, does not exceed five years. Such contract need not be terminable by the qualified user prior to the end of the term. For purposes of this section 5.03(7), a tiered productivity award as described in section 5.02(3) will be treated as a stated amount or a periodic fixed fee, as appropriate.
While the Announcement discusses the need for guidance for healthcare organizations participating in the Medicare Shared Savings Program, the new category (7) is not expressly limited to contracts relating to the Program. Moreover, this new category permits a longer contract term for arrangements covered by existing categories [(4), (5) and (6) of Rev. Proc. 97-13]. In light of the new category (7), it is unclear why the sections 5.03(4)-(6) of Rev. Proc. 97-13 were not eliminated and the new category (7) added as a replacement section 5.03((4).
This interim guidance creating this new category of permissible arrangements applies both to contracts entered into before January 22, 2015 and to contracts entered into on or after January 22, 2015.
The Announcement also solicits public comments on this interim guidance and on further guidance needed to facilitate participation in the Medicare Shared Savings Program. Public comments should be submitted in writing on or before January 22, 2015.
