Hospitals, Policy

IRS may deny tax-exempt status to commercial ACOs

An IRS report last week added to industry-watchers’ suspicions that obtaining tax-exempt status will be an uphill battle for ACOs that do not participate in the Medicare Shared Savings Program.

T.J. Sullivan

Additional hints that the Internal Revenue Service will be unlikely to give so-called commercial Accountable Care Organizations (ACOs) tax-exempt status emerged last week. The Advisory Committee on Tax Exempt and Government Entities (ACT) published its Report of Recommendations on June 8, and it added to industry-watchers’ suspicions that obtaining tax-exempt status will be an uphill battle for ACOs that do not participate in the Medicare Shared Savings Program (MSSP).

ACOs were one of many results of the Affordable Care Act, and allow hospitals and physicians to work together to try and take on risk from multiple standpoints, including both financial and quality-of-care. There are two major classifications of ACOs: those that participate in the MSSP and those that do not; the latter are often referred to as commercial ACOs, according to T.J. Sullivan, of the law firm of Drinker, Biddle & Reath.

“When the IRS announced in 2011 that they would likely find only ACOs participating in the MSSP to be tax-exempt, due to the fact they lessen the burdens of government, they were more silent and less clear about how they would handle commercial ACOs that work only with insurance companies,” said Sullivan. Since then, experts have been waiting for indications from the IRS on how the tax status of commercial ACOs would be handled.

The biggest indication to date came on April 8, when a commercial ACO was officially denied tax-exempt status. Sullivan said the ruling found there was too much benefit to the participating physicians and commercial payers for the IRS to determine a favorable tax exemption. “We don’t know what the IRS will do about others, including dual-status ACOs, that both participate in the MSSP and contract with commercial payers,” Sullivan said.

Since that ruling, industry experts have returned to watching and waiting. In the Report of Recommendations, the Exempt Organizations division of the ACT announced the formation of six Knowledge Networks (K-Nets), including one for hospitals and healthcare. K-Nets are internal documents, designed to “train and inform staff,” according to the report.

“We all hoped they would make the K-Nets public,” said Sullivan. Instead, the IRS promised to post “issue snapshots,” which are informal documents intended as education tools for those working in a tax exempt sector, on its website. One of the available issue snapshots is for ACOs. “It won’t likely say anything tremendously new,” said Sullivan, “but it will summarize the IRS’ thinking.”

It is unclear how the tax status of ACOs could affect independent physicians or small networks. It is likely to push more ACOs to participate in the MSSP, Sullivan said. “It will lead to advocacy,” he added, offering a recent letter from the American Hospital Association to the Treasury as an example of what we are likely to see in the future.