AHA: Commercial ACO Tax Ruling Impedes Value-Based Care Models

June 03, 2016 - By stripping commercial accountable care organizations (ACOs) of their charitable tax exempt status, the IRS could be threatening the future of value-based care and care coordination, according to the American Hospital Association (AHA).

In a letter addressed to IRS Commissioner John Koskinen, the AHA explained that the recent ruling against upholding tax-exempt status for an unnamed ACO was unfounded. Non-Medicare ACOs promote better healthcare for different communities like Medicare Shared Savings Program (MSSP) ACOs and, therefore, deserve a nonprofit, tax-exempt designation.

“We are seriously concerned that the IRS has adopted a ruling position that means nonprofit hospitals risk losing their tax exemption if they pursue a modern approach to clinically integrated health care that holds the greatest promise for improving outcomes and reducing costs,” wrote Melinda Reid Hatton, the AHA’s Senior Vice President and General Counsel.

The AHA advised the IRS to publically acknowledge that when hospitals collaborate with healthcare providers in the community and other physicians with the goals of coordinating care and reducing healthcare costs, it should be considered charity.

Even though ACOs provide financial incentives for providers who implement value-based care, those incentives are primarily benefitting the patients through better population health management programs and patient-centered care.

Without proper non-profit recognition, the AHA stated that commercial ACOs could lose crucial funds for improving care coordination and some providers may reconsider participation the organizations.

“To make that clear, it is imperative that IRS publish guidance affirming that hospitals may participate in ACOs without generating a tax cost or incurring the catastrophic loss of their tax-exempt status,” added Hatton. “Such guidance will remove what appears to be a serious obstacle for nonprofit hospitals striving to coordinate care for their communities and make other improvements in delivering population health.”

A non-profit hospital or healthcare system earns charitable tax exempt status by improving healthcare for the communities they service, but the AHA noted that traditional healthcare models are being phased out as the industry transitions to value-based care.

As more healthcare organizations shift from fee-for-service models, some providers have entered into agreements with for-profit and nonprofit organizations to implement new value-based care models and manage the financial risks.

ACOs have been key in supporting the new care models that expect high levels of care coordination, preventative care, and cost reductions, noted the AHA.

“Whatever the payment arrangement, the ACO makes the providers accountable for the care they provide. ACOs succeed when individuals stay healthier,” explained Hatton. “When the ACOs manage costs, the shared savings are available to fund the financial incentives.”

Additionally, ACOs are designed to engage public and private healthcare payers with new value-based payment models. For MSSP ACOs, Medicare functions as the payer. However, commercial ACOs rely on private insurers and self-insured plans or combine MSSP with private arrangements.

While IRS argued that MSSP ACOs promote the healthcare of governmental program beneficiaries, the AHA asserted that commercial ACOs are able to improve the healthcare of different communities, including geographic areas or patient-centered groups, like cancer patients or children.

“Unfortunately, the recent IRS denial letter tells nonprofit hospitals seeking to form or participate in ACOs outside of the MSSP that they are risking their tax exemption,” stated Hatton.

“If they join with physicians in their community – beyond the physicians they employ or accept on their medical staff – to contract with payers or perform the analytics necessary to track where interventions can be made to improve health at lower cost, the ruling says that the ACO would be operating for the benefit of the physicians not the community.”

According to the IRS, the ACO in question did not provide the direct delivery of healthcare or perform health services to the general public, which resulted in disqualification from charitable tax-exempt status. Rather, the organization was more invested in its own commercial success.

“The promotion of health has long been recognized as a charitable purpose,” said IRS representatives in a letter. “However, not every activity that promotes health supports tax exemption.”

IRS noted that the organization did act as an ACO by addressing the triple aim goals of the Affordable Care Act, which are increasing patient access, improving the quality of care, and reducing healthcare costs. However, the agency found that the organization’s primary focus was on creating contracts and managing deals with commercial payers instead of advancing the public good through patient care services.

The recent ruling could impact the steady rise in ACOs since the beginning of the year as providers are becoming more cautious of what payers they deal with and how they coordinate patient care with other physicians.

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