The Internal Revenue Service (IRS) will review accountable care organization (ACO) arrangements on a case-by-case basis, partly aimed at ensuring that tax exemptions go to legitimate nonprofit hospitals participating the Medicare Shared Savings Program, according to a column by the Waller Lansden Dortch & Davis LLP healthcare practice. With the Centers for Medicare & Medicaid Services (CMS) final rule released on Oct. 20, the IRS anticipated that some individuals or parties in ACOs might financially benefit from Shared Savings, conflicting with some organizations' nonprofit, tax-exempt status, according to a March notice recently confirmed by the IRS.
CMS does not mandate a particular structure for ACOs. ACOs, although they must be organized, do not have to be a particular type of legal entity, according to an IRS press release. Different structures will have different tax consequences. An ACO that is structured as a corporation for federal tax purposes generally will be treated as a separate entity from its participants, whereas the activities of an ACO structured as a partnership will be attributed to the partners. An ACO that is an LLC may choose to be either a corporation or partnership for tax purposes.
Organizations are exempt from corporate taxes if they primarily operate for charitable, scientific, or education purposes and their net earnings don't benefit any insiders (i.e., private shareholders or individuals), according to the notice. For hospitals, tax exemption typically means the healthcare organization provides services for poor or underprivileged patients. However, the IRS noted that not all activities that promote health quality qualify for tax exemptions. For instance, prescription pharmaceuticals can promote health, but pharmacies do not qualify for 501(c)(3) exemption on that basis.
The IRS will consider tax-exempt organizations participating in Shared Savings valid if they qualify for the following:
- The terms of the nonprofit hospital, that is, the tax-exempt organization in the ACO, including its share of how much it will pay or lose, are written out in an agreement
- CMS has accepted the ACO into the Program
- The tax-exempt organization's share of benefits from the ACO is proportional to the benefits that it provides the ACO
- The tax-exempt organization shares in the ACO's losses
- All contracts and transactions are at fair market value
However, the IRS clarified that the charitable organization in the ACO doesn't have to satisfy all five factors as long as it prevents inurement or impermissible private benefit.
For more information:
- read the IRS press release
- here's the notice (.pdf)
- read the Waller column
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