In a letter dated May 31, to Sarah Hall Ingram, Commissioner for Tax Exempt and Government Entities – the American Hospital Association (AHA) asked the IRS to make it clear that participating in an accountable care organization (ACO) will not result in impermissible inurement or private benefit to tax-exempt nonprofit hospitals and will not generate unrelated business income tax (UBIT) if the entity involved is in compliance with the Centers for Medicare and Medicaid Services’ (CMS) eligibility rules for participation in the Medicare Shared Savings Program (MSSP).

In Notice 2011-20 dated March 23, 2010, the IRS asked for comments regarding the participation of tax-exempt hospitals in MSSP designed to promote the formation of ACOs to coordinate and improve care for Medicare beneficiaries beginning January 2012. See McGuireWoods’ Healthcare Reform webpage for further discussion of the law and issues regarding ACOs.

While Notice 2011-20 appears to assure tax-exempt participants that properly structured ACOs and organizations that meet CMS criteria will not jeopardize their tax-exempt status or generate UBIT, other statements in the Notice indicate that the IRS will evaluate ACO arrangements on a case-by-case basis. AHA requested that the IRS should specifically address the potential for tax-exempt status for an eligible ACO itself and to issue the following guidance:

  • A clear statement that tax-exempt hospitals, participating in an eligible ACO, will not result in impermissible inurement and private benefit and will not generate UBIT, so long as the ACO complies with regulations promulgated by CMS;
  • A clear statement indicating whether the IRS will consider granting tax-exempt status to ACOs; and
  • Clear guidance that the IRS will extend its existing joint venture precedents to other clinically integrated organizations that do not choose to participate in the ACO program, but provide similar benefits, and do so in a flexible manner that recognizes that such organizations may take a variety of forms in their efforts to provide accountable care to diverse communities.

Joint Venture Guidance

The AHA also asked the IRS to clearly state that it will apply to ACOs existing guidance on furthering charitable purposes found in numerous Revenue Rulings and Private Letter Rulings regarding joint ventures between tax-exempt hospitals and private individuals or for profit entities in a clinically integrated organization based on the following factors:.

  • The venture promotes health among a broad spectrum of the community;
  • The amount of control the tax-exempt organization exerts over the venture, which may be evidenced either by the number of votes the exempt organization possesses on the board of the joint venture, the power that is granted to the exempt organization by the venture’s governing documents, or the operational role of the exempt organization in the venture. See Rev. Rul. 98-15 and Rev. Rul. 2004-51;
  • Management of the entity consistent with tax-exempt purposes, evidenced by provisions in the organizational documents of the venture and also in the management of the venture by parties unrelated to the for-profit member;
  • Limitations on investment made by the tax-exempt organization and the exempt organization’s ownership interests in the venture relative to its investment;
  • Distributions received and whether they are consistent with the parties’ economic interests in the venture;
  • Expertise that an exempt organization obtains from the venture , which may not be otherwise available to it; and
  • Recruitment incentives to physicians that reasonably promote and protect the health needs of the community under Rev. Rul. 97-21.

Oversight by the FTC and DOJ

The AHA letter further indicated that the oversight provided by the Federal Trade Commission and the Department of Justice (FTC/DOJ) in the Statements of Antitrust Enforcement Policy should assure the IRS that the eligible ACOs are legitimate and not shams.