On March 31, 2011, the Internal Revenue Service (“IRS”) issued Notice 2011-20, which considers the federal income tax implications to exempt hospitals and other health care organizations participating in the Medicare Shared Savings Program (“MSSP”) through an accountable care organization (“ACO”).

Background on ACOs and the MSSP

An ACO is a network of physicians, hospitals, and other health care providers that shares responsibility for providing care to patients. Under the Patient Protection and Affordability Care Act (Pub. L. No. 111-148) enacted March 23, 2010, the MSSP will reward ACOs that lower costs while meeting quality standards.

On March 31, 2011, the Centers for Medicare and Medicaid Services (“CMS”), the agency within the Department of Health and Human Services that administers the Medicare program, released its proposed rule for ACOs. The proposed rule contains specific, proposed eligibility criteria that entities would have to meet to qualify as ACOs under the MSSP and describes quality measures, reporting requirements, and monitoring by CMS. Under the proposed rule, potential ACOs seeking to participate in the MSSP would be required to apply to CMS for approval. The proposed rule seeks to implement two ACO models, a one-sided risk model (sharing savings only for the first two years and sharing savings and losses in the third year) and a two-sided risk model (sharing savings and losses for all three years).

Participation by Tax-Exempt Organizations in the MSSP Through ACOs

In Notice 2011-20, the IRS identifies two primary issues of concern to existing exempt organizations that intend to participate in the MSSP through ACOs: (i) avoiding private inurement and impermissible private benefit and (ii) dealing with unrelated business taxable income (“UBTI”).

Private Inurement & Impermissible Private Benefit

In the Notice, the IRS acknowledges that tax-exempt organizations typically will be participating in the MSSP through an ACO along with private parties, including some that might be considered insiders with respect to the tax-exempt organization. To avoid adverse tax consequences, the tax-exempt organization must ensure that its participation in the MSSP through an ACO is structured so as not to result in its net earnings inuring to the benefit of insiders or in its being operated for the benefit of private parties participating in the ACO. In light of CMS regulation and oversight of the MSSP, the IRS anticipates that a tax-exempt organization’s participation in the MSSP through an ACO would not result in inurement or impermissible private benefit to the private party ACO participants where:

  • The terms of the tax-exempt organization’s participation in the MSSP through the ACO (including its share of MSSP payments or losses and expenses) are set forth in advance in a written agreement negotiated at arm’s length;
  • CMS has accepted the ACO into, and has not terminated the ACO from, the MSSP;
  • The tax-exempt organization’s share of economic benefits derived from the ACO is proportional to the benefits or contributions the tax-exempt organization provides to the ACO;
  • The tax-exempt organization’s share of the ACO’s losses does not exceed the share of ACO economic benefits to which the tax-exempt organization is entitled; and
  • All contracts and transactions entered into by the tax-exempt organization with the ACO and the ACO’s participants, and by the ACO with the ACO’s participants and any other parties, are at fair market value.



In the Notice, the IRS states that absent inurement or impermissible private benefit, it would expect that any MSSP payments received by a tax-exempt organization from an ACO would be derived from activities that are substantially related to the performance of the charitable purpose of lessening the burdens of government and thus would not constitute UBTI to the tax-exempt organization. Additionally, while the Notice does not address whether and under what circumstances a tax-exempt organization’s participation in non-MSSP activities through an ACO will further or be substantially related to an exempt organization’s exempt purpose or not result in UBTI, the IRS states that it recognizes that certain non-MSSP activities may further or be substantially related to an exempt purpose and thus would not constitute UBTI to such organization.

IRS Requests Comments

The IRS is soliciting comments as to whether existing guidance relating to the Code provisions governing tax-exempt organizations is sufficient for those tax-exempt organizations planning to participate in the MSSP through an ACO and, if not, what additional guidance is needed. The IRS is also soliciting comments concerning whether guidance is needed regarding the tax implications for tax-exempt organizations participating in activities unrelated to the MSSP, including shares savings arrangements with commercial health insurance payers, through ACOs. Public comments should be submitted in writing on or before May 31, 2011 and sent to the following address:

Internal Revenue Service
SE: T: EO: RA: G (Notice 2011-20)
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

You can access the full text of Notice 2011-20 by clicking here.