On October 24, 2014, the Internal Revenue Service (the “IRS”) issued Notice 2014-67 (the “Notice”) to provide interim guidance for determining whether a state or local governmental entity or, in the case of qualified 501(c)(3) bonds, an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”), will be considered to have “private business use” of its bond-financed facilities under Sections 141 or 145(a)(2)(B) of the Code as a result of its participation in the Medicare Shared Savings Program (the “MSSP”) through an accountable care organization (an “ACO”).1
The Patient Protection and Affordable Care Act, enacted in March 2010,2 among other things, amended Title XVIII of the Social Security Act (the “SSA”)3 by adding a new Section 1899, which directs the Secretary of the Department of Health and Human Services (“HHS”) to establish the MSSP to promote accountability for care of Medicare beneficiaries, improve the coordination of Medicare fee-for-service items and services and encourage the investment in infrastructure and redesigned care processes for high quality and the efficient delivery of services. Under Section 1899(b)(1) of the SSA, groups of health care service providers and suppliers that have established a mechanism for shared governance and that meet criteria specified by HHS are eligible to participate as ACOs in the MSSP.
More specifically, Section 1899(b)(1) of the SSA provides examples of groups of service providers and suppliers that may form an ACO, including (i) physicians and other health care practitioners (“ACO Professionals”) in a group practice, (ii) a network of individual practices, (iii) a partnership or joint venture arrangement between hospitals and ACO Professionals, and (iv) a hospital employing ACO Professionals. An ACO that meets quality performance standards established by HHS and demonstrates that it has achieved savings against an appropriate benchmark of expected average per capita Medicare fee-for-service expenditures will be eligible to receive payments for Medicare shared savings.4
Section 1899(b)(2) of the SSA contains various requirements for an ACO to participate in the MSSP, including among other things that the ACO agree with the Secretary of HHS to participate in the MSSP for not less than a three-year period, that the ACO have a “formal legal structure” that would allow it to receive and distribute MSSP payments to participating providers of services and suppliers and that the ACO have primary care ACO Professionals sufficient for the number of Medicare fee-for-service beneficiaries assigned to the ACO (which number must be at least 5,000).
In November 2011, the Centers for Medicare & Medicaid Services (“CMS”) published final regulations addressing Section 1899 of the SSA5 and containing specific eligibility criteria for entities to qualify as ACOs under the MSSP. These regulations require an ACO, among other things, to be a legal entity formed under applicable state, federal or tribal law, to provide for meaningful participation in the composition and control of the ACO’s governing body by ACO participants (or their designated representatives), and to provide a “two-sided model” under which the participating ACO not only would be eligible to share in cost savings at higher rates but also would be required to repay losses resulting from spending that exceeds a benchmark of average per capita Medicare fee-for-service expenditures.
Sections 141 and 145(a)(2)(B) of the Code impose limits on the amount of proceeds of a tax-exempt bond issue that may be used in the trade or business of nonexempt persons. Use of bond-financed property in a trade or business of any person, other than (i) a state or local government unit, or (ii) in the case of qualified 501(c)(3) bonds, an organization described in Section 501(c)(3) of the Code (a “501(c)(3) organization”), gives rise to private business use. Further, use by a 501(c)(3) organization of bond-financed property in an activity that is an unrelated trade or business is also treated as private business use. Private ownership, leases to private entities and non-qualifying management and service contracts (including physician contracts) constitute private business use. In addition, private business use may result from arrangements that convey “special legal entitlements” or “special economic benefits” with respect to bond-financed property to a private person.
The IRS acknowledges in the Notice that state and local governmental units and, in the case of qualified 501(c)(3) bonds, 501(c)(3) organizations (collectively, “qualified users”) will typically be participating in the MSSP through ACOs with nongovernmental persons, and that such participation in an ACO may take a variety of forms, including membership in a nonprofit membership corporation, ownership of shares in a corporation, ownership of an interest in a partnership and ownership of a membership interest in a limited liability company. The Notice states that participation by a qualified user of a health care facility financed with tax-exempt bonds in the MSSP through an ACO that includes participants that are not qualified users must be structured so as not to result in private business use of the facility, and, in the case of a 501(c)(3) organization, structured so that its participation does not jeopardize its 501(c)(3) status or cause it to be engaged in an unrelated trade or business.6
Arrangements in which a qualified user enters into a management or service contract with an ACO are addressed by the Notice’s amplification to Rev. Proc. 97-13. With respect to a qualified user’s participation in an ACO, the Notice states that the participation of a qualified user in the MSSP through an ACO will not by itself result in private business use of the bond-financed facility if all of the following six conditions are met:7
The terms of the qualified user’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 qualified user’s share of economic benefits derived from the ACO, including its share of MSSP payments, is proportional to the benefits or contributions the qualified user provides to the ACO. If the qualified user receives an ownership interest in the ACO, the ownership interest received must be proportional and equal in value to the qualified user’s capital contributions to the ACO, and all ACO returns of capital, allocations and distributions are made in proportion to the parties’ ownership interests.
The qualified user’s share of the ACO’s losses, including its share of MSSP losses, does not exceed the share of ACO economic benefits to which the qualified user is entitled.
All contracts and transactions entered into by the qualified user with the ACO and the ACO’s participants, and by the ACO with the ACO’s participants and other parties, are at fair market value.
The qualified user does not contribute or otherwise transfer the bond-financed property to the ACO unless the ACO is a state or local governmental entity or, in the case of qualified 501(c)(3) bonds, either a state or local governmental entity or a 501(c)(3) organization.
Whether a qualified user’s participation in arrangements that do not meet all of the above six conditions, either initially or subsequently (e.g., if an ACO withdraws from participation in the MSSP), and similar arrangements a qualified user may enter into with other types of health insurers (e.g., private insurance companies) are not addressed by the Notice.
The changes made by the Notice with respect to ACOs apply to bonds sold on or after January 22, 2015. In addition, the Notice states that such changes may be applied to bonds sold before January 22, 2015.
Request for Public Comments
The Notice solicits comments on the guidance provided by the Notice and on further guidance needed to facilitate participation in the MSSP by qualified users through ACOs. Such comments should be submitted in writing on or before January 22, 2015. The addresses, both physical and electronic, to which comments should be sent are set forth in the Notice