On April 8, the Internal Revenue Service (IRS) denied a tax
exemption to an accountable care organization (ACO) because it was
not being operated exclusively for charitable purposes and it
operated, in part, for the benefit of private interests. This IRS
adverse exemption determination stands as a strong warning to ACOs
seeking to qualify for an exemption from federal income tax but not
participating in the Centers for Medicare & Medicaid
Services' Medicare Shared Savings Program (MSSP).
ACOs are groups of healthcare providers (including doctors and
hospitals) that work to synergize patient care and foster
accountability among providers in the ACO's network. Some ACOs
participate only within the MSSP, while others have arrangements
with commercial insurers and some do both. In order for an ACO to
qualify for a federal income tax exemption as an organization under
Internal Revenue Code section 501(c)(3), it must be both organized
and operated exclusively for one or more of the purposes specified
in the section, including, but not limited to, (i) relief of the
poor and distressed, (ii) lessening of the burdens of the
government, and (iii) promotion of health. The ACO must establish
that it operates primarily for activities that accomplish exempt
purposes and that almost all of its activities further such purpose
or purposes. The presence of a single substantial nonexempt purpose
destroys the exemption regardless of the number or importance of
the exempt purposes. The IRS has previously determined that ACO
participation within the MSSP furthers the charitable purpose of
lessening the burdens of government.
The ACO in question, formed by an unnamed nonprofit healthcare
system, was formed to negotiate with commercial payers and does not
participate in the MSSP. Despite not participating in the MSSP, the
ACO requested an exemption citing its charitable purpose as
lessening the burdens of government. The IRS noted that such an
exempt charitable purpose is not applicable to non-MSSP ACOs. In
addition, though promotion of health is an exempt charitable
purpose, the IRS noted that not every activity that promotes health
furthers exempt charitable purposes; in this case, negotiating with
private health insurers on behalf of unrelated healthcare providers
is not considered an exempt charitable activity because the private
benefit to ACO members outweighs the community benefit.
So commercial ACOs seeking exemptions be warned: It is likely
an uphill battle to be granted a tax exemption if the ACO is not
participating in the MSSP.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
