Provisions of Affordable Care Act Could Impact Tax-Exempt Status of Certain Bonds

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Summary

Certain payment models created under the Patient Protection and Affordable Care Act intended to coordinate care and lower healthcare costs raise questions concerning the tax-exempt status of debt issued by certain healthcare entities.

The Medicare Shared Savings Program created pursuant to the Patient Protection and Affordable Care (the “Act”) provides an opportunity for eligible providers, hospitals and suppliers to work together to manage and coordinate care through an accountable care organization (“ACO”). An ACO may include both taxable and tax-exempt members.

Many healthcare facilities have been financed with proceeds of tax-exempt bonds and are therefore subject to the requirements of the Internal Revenue Code of 1986, as amended, including the amount of private business use that can occur in such facilities. Existing Treasury Regulations identify arrangements that result in private business use and provide that other comparable arrangements may result in private business use. The amount of private business use in a healthcare facility can jeopardize the tax-exempt status of such bonds. Due to the limited nature of safe harbors in pertinent Treasury Regulations there is uncertainty as to whether the creation of ACOs and the contracts expected to be entered into by ACOs result in private business use.

Earlier this month, Rep. Jim McDermott, ranking member of the House Ways and Means Health Subcommittee, urged the Internal Revenue Service and the Treasury Department to quickly update its 16-year-old safe harbor provisions under existing tax law in order to protect the tax-exempt status bonds issued by health care facilities and to recognize new payment models between hospitals and physicians to promote care coordination and efficiency. The National Association of Bond Lawyers has sent a letter to the Internal Revenue Service and the Treasury Department expressing the same concerns.

Members of the Saul Ewing Public Finance Practice Group will continue to monitor this issue and will provide an update if and when the Treasury Department and/or the Internal Revenue Service addresses the issue of ACOs and tax-exempt bonds.