United States: Commercial ACOs Be Wary: MSSP Participation Key Factor in Determining ACO Tax-Exempt Status

Last Updated: June 14 2016
Article by Emily J. Kagan

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.

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