Exempt Hospitals Seek Clear IRS Guidance, Flexibility to Contract Outside CMS Program

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Hospital systems and trade groups urged the Internal Revenue Service in recent comment letters to provide the clarification and guidance necessary for tax-exempt health care providers to feel confident that they can participate in accountable care organizations (ACOs) over the long term without risking the loss of their exemption.

They urged IRS to delineate the circumstances under which exempt providers that participate in ACOs and the Medicare Shared Savings Program created by the Patient Protection and Affordable Care Act will, with IRS's blessing, be able to contract with private payers through that ACO both before and after they leave the program.

Several commenters also told the IRS to state unequivocally that it will consider granting a tax exemption to a properly structured ACO. Recognition of a tax-exempt ACO model is consistent with the past treatment by the service of new arrangements between tax-exempt entities and for-profit partners and "essential to achieve the important health reform goals," one health system said.

Comments submitted by Allina Hospitals & Clinics, which is based in Minneapolis and already operates an integrated health care delivery system serving Medicare beneficiaries, said that additional guidance is needed to assuage concerns in the exempt provider community that participation in an ACO may, sooner or later, threaten exemption.

"While we may be eager to move into new payment and care delivery models, including those that involve shared risk, there is underlying anxiety that the policies of the Internal Revenue Service may create risk to retaining the tax-exempt status of hospitals and therefore may result in very limited participation in the program," Allina said.

The American Hospital Association in its comments asked IRS to make it clear that participating in an ACO will not result in impermissible private inurement and private benefit and will not generate unrelated business income tax for tax-exempt providers as long as they are in compliance with Centers for Medicare & Medicaid Services rules.

AHA, citing IRS's decision to grant tax exemptions to regional health information organizations (RHIOs), said the service also should clarify that it is willing to consider granting tax-exempt status to an ACO itself. This will "encourage participation by tax-exempt hospitals and ensure that ACOs' activities further a charitable purpose," AHA said.

In addition, IRS should extend its approval of exempt provider participation in joint ventures with clinically integrated organizations whether or not they are approved for the MSSP, AHA said. It noted that IRS has used its discretion historically to find that exemption for a clinically integrated entity composed of an exempt hospital is appropriate where the entity promotes health, benefits the community at large, and generates only an incidental amount of private benefit.

Other hospital and provider groups echoed these sentiments in their critiques of IRS Notice 2011-20 issued March 31 (107 HCDR, 6/3/11).

Safe Harbor Needed

VHA Inc., an Irving, Texas, alliance of thousands of nonprofit community hospitals and non-acute care organizations, said IRS should issue guidance creating a safe harbor for exempt providers participating in the MSSP and apply the same safe-harbor rationales to ACOs contracting outside the program on the ground that those activities are substantially related to their tax-exempt purposes.

"VHA believes that when the ACO conducting such activities is effectively controlled by one or more tax-exempt hospitals, the ACO activities should be treated as furthering a charitable purpose," it said.

Several commenters, however, identified the tension between the "control test," historically employed by IRS in considering joint ventures between exempt and for-profit health care organizations, and the requirement in the proposed CMS guidance that providers share governance of the ACO.

The Texas Medical Association, for example, cited the tension as a reason that an ACO seeking exemption not be allowed to deem its for-profit partners—physician groups or other entities—as integral parts or "captives" of the nonprofit hospital or some other tax-exempt partner to qualify for exemption. Rather, a tax-exempt ACO should incorporate a shared governance structure and be required by the IRS to qualify for exemption based on a traditional assessment of its community benefit, TMA said.

Hospital Sisters Health System, a multistate health system with headquarters in Springfield, Ill., suggested in its comments that the tension be resolved by IRS relaxing its position on control and allowing formation of ACOs in which the nonprofit entity does not control the activities of the ACO as a whole.

"If the Service takes the position that a tax-exempt participant must control the joint venture or control the ‘charitable activities' of the ACO in order to avoid adverse tax-exemption or unrelated business income tax [UBIT] consequences, that position will be a significant impediment to the formation of ACOs involving tax-exempt entities," it said.

HSHS said control should not really be a major issue for the IRS, even for ACOs that are themselves exempt entities. For ACOs that might never participate in the MSSP, there are still "alternate protections"—such as community needs assessments, independent compensation and performance reviews, and additional charitable activities—that could be expected from these entities to ensure that charitable purposes are served, HSHS said.


One of the commenters' top concerns with the IRS proposal is that the compensation and investment recapture proportionality requirements as currently outlined will be a big disincentive for doctors and other providers to get involved.

The comments pointed to five requirements the IRS set out in the proposal for prospective ACOs to avoid claims of private inurement or private benefit. One was that economic benefits derived from the ACOs must be proportional to the benefits a participating exempt organization contributes to the ACO.

VHA focused on the sharing of savings in the joint venture context, particularly where joint venture owners are also providers, saying that IRS needs to reconcile its traditional approach to proportionality of gains and losses—which is generally determined by ownership interests and, in turn, capital contributions of the respective owners—with the approach taken by CMS.

The CMS approach "appears to contemplate the distribution of significant portions of the shared savings based on medical providers' contributions towards quality performance and attainment of savings goals—irrespective of ownership interests," Edward Goodman, VHA Inc. vice president of public policy, said.

As an example of potential conflict, he cited a situation in which a hospital contributes $60 in capital to an ACO, while a medical practice group contributes $40. While the initial ownership interests are 60 percent and 40 percent, respectively, the medical practice group may be responsible for 75 percent of the cost savings and high quality of care. VHA Inc. asked for more guidance on the question of whether savings would have to be shared strictly in proportion to capital contributions.

Fair Market Value Requirements

More guidance is also needed on the fair market value requirements, VHA Inc. said. Since IRS was willing to put out guidance in 2007 assuring hospitals that providing financial incentives to staff physicians for electronic health records capability would not be treated as impermissible private benefit or private inurement as long as the subsidies met Department of Health and Human Services regulation requirements and did not violate federal anti-kickback and physicians referral laws, IRS could do the same thing with ACOs, Goodman said.

Hospitals anticipate that CMS may be willing to approve practice management services, clinical case management and coordinated services, and technology services as eligible for anti-kickback and physician self-referral waivers to incentivize physician participation in ACOs, he said. The condition would be that the waivers must be made available to all participating providers without regard to the volume or value of their referrals.

Meanwhile, UPMC Health Plan in its comments asked what factors would trigger reviews of the arm's-length nature of negotiations or the fair market value of contracts and transactions, as well as the criteria upon which determinations will be based, and the entities responsible for conducting the reviews. The plan owned by the University of Pittsburgh Medical Center is part of an integrated health care delivery system.

Because inclusion of smaller ACO participants will be critical to the MSSP's success, and ACO start-up costs will be substantial, UPMC said better funded exempt organizations may be called on to assume disproportionate shares of financial and other obligations than would otherwise generally be expected.

"Whether seemingly lop-sided negotiations, contracts, or transactions will be considered ‘arm's length' or of ‘fair market value' is an open question of considerable consequence to a tax-exempt organization," Daniel Vukmer, vice president and general counsel with UPMC insurance division services, said. UPMC asked for additional guidance on both the standards of review and procedural mechanisms by which these determinations will be made.

Focus on Tax-Exempt Purpose

UPMC also shared VHA's concern about the proportionality requirement for economic benefits, saying "the inquiry should instead focus upon whether such investments are made in furtherance of a tax exempt organization's exempt purpose and or the goals of the MSSP, including the promotion of health by lowering medical costs and improving health care quality." IRS should articulate such a standard, Vukmer said.

Comments by the Texas Medical Association strongly opposed the proportionality requirement, saying it would act as a disincentive for tax-exempt hospitals to collaborate with independent physician practices to form ACOs. "This is true because it fails to adequately acknowledge the physicians' significant non-capital investments [such as services and expertise] in the ACO and will constrain disbursements of payments to physician participants," said Asa Lockhart, chair of the ad hoc committee on ACOs, said in the association's comment letter.

CMS estimated the aggregate cost for start-up investment and first year operating expenditures for MSSP ACOs will range from $131 million to $263 million, assuming 75 to 150 ACOs participate in the MSSP, Lockhart said. It is likely that hospitals participating in ACOs, including tax-exempt hospitals, will be the primary providers of capital for the startup costs.

"Therefore it looks like under the IRS guidance as currently drafted, the tax exempt hospital will take the lion's share of MSSP payments, despite considerable non-capital contributions by physicians," Lockhart said. TMA strongly urged IRS to allow MSSP payments to "appropriately recognize" the expertise of physicians and other providers.

Methodology, Not Precise Percentages

Premier healthcare alliance commented on the CMS requirement that ACOs submit a written description of the methodology to be employed in distributing shared savings among the ACO, ACO participants, and ACO providers and suppliers.

The alliance, serving 2,500 hospitals and health systems, urged the service to state that if the methodology by which the exempt entity's participation in the MSSP through the ACO—including its share of MSSP payments or losses and expense allocations from the ACO—is made in writing, that disclosure, rather than requiring that the terms themselves be disclosed, will be sufficient.

Premier said most observers expect ACOs to establish incentive pools, funded with MSSP payments, to be shared among ACO participants based on their respective efforts at achieving the MSSP objectives. Any residual net income would then be split among the ACO's equity owners, if it is a for-profit entity.

It is important for the service to understand that it will often not be possible, or desirable, to set forth in advance the precise percentages in which each ACO participant will share any pools funded with MSSP payments, said Blair Childs, Premier's senior vice president for public affairs. ACOs should have the ability to divide any pools from MSSP payments earned by the ACO in proportion to the relative benefits or contributions that each ACO participant provides.

By Diane Freda and Peyton M. Sturges

The VHA letter is at http://op.bna.com/hl.nsf/r?Open=psts-8hlmhe . The AHA comments are at http://op.bna.com/hl.nsf/r?Open=psts-8hlmhf . The UPMC Health Plan comments are at http://op.bna.com/hl.nsf/r?Open=psts-8hlmhl . The Texas Medical Association letter is at http://op.bna.com/hl.nsf/r?Open=psts-8hlmhg . The Premier comments are at http://op.bna.com/hl.nsf/r?Open=psts-8hlmhj . The Hospital Sisters Health System letter is at http://op.bna.com/hl.nsf/r?Open=psts-8hlmhk . The Allina Hospitals & Clinics letter is at http://op.bna.com/hl.nsf/r?Open=psts-8hlmhh .