In a Private Letter Ruling released on April 8, the Internal Revenue Service (IRS) denied a tax exemption to an accountable care organization (ACO) because it was being operated, in part, for the benefit of private interests, rather than exclusively for charitable purposes as required by the Internal Revenue Code (I.R.C.). The IRSs adverse determination stands as a strong warning that ACOs will likely need to participate in the Centers for Medicare & Medicaid Services Medicare Shared Savings Program (MSSP) if they hope to be granted tax-exempt status.
ACOs are groups of healthcare providers (including doctors and hospitals) that work to synergize patient care and foster accountability among providers in the ACOs 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 I.R.C. 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 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. Although this ACO does not participate in the MSSP, it requested an exemption citing its charitable purposes as promotion of health and lessening the burdens of government. The IRS noted that the latter does not apply to non-MSSP ACOs. In addition, although 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 tax-exempt status be warned: It will likely be an uphill battle to be granted a tax exemption if the ACO is not participating in the MSSP.