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Regulation and Compliance > Federal Regulation > IRS

IRS Might Issue ACO Guidance

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The Internal Revenue Service (IRS) is asking whether it needs to issue new guidance to help tax-exempt health care organizations participate in the new Medicare Shared Savings Program (MSSP) accountable care organization (ACO) initiative.

The IRS has put out a call for comments in IRS Notice 2011-20.

An ACO is supposed to be a vehicle for paying teams of health care providers to provide and manage care for whole patients, instead of paying for care one service at a time.

Section 3022 of the Patient Protection and Affordable Care Act (PPACA) requires CompassMedicare to set up a Medicare Shared Savings Program that will promote use of Medicare ACOs starting in 2012.

The Centers for Medicare and Medicaid Services (CMS) will publish an ACO proposed rule and notice in the Federal Register April 7.

In theory, the people and entities that participate in an ACO should have a financial incentive to control costs for all participants in the ACO.

Section 501(c)(3) of the Internal Revenue Code forbids tax-exempt charitable, scientific or educational institutions from letting net earnings inure to the benefit of any private individual.

If tax-exempt health care organization is participating in an ACO, then, “to avoid adverse tax consequences, the tax-exempt organization must ensure that its participation in the MSSP through an ACO is structured so as not to result in its net earnings inuring to the benefit of its insiders or in its being operated for the benefit of private parties participating in the ACO,” IRS officials say in the

new notice. “The IRS must determine whether prohibited inurement or impermissible private benefit has occurred on a case-by-case basis, based on all the facts and circumstances.”

Officials say the IRS probably will approve of tax-exempt health care organization participation in MSSP ACOs in cases in which:

  • The terms of the tax-exempt organization’s participation in the MSSP through the ACO are “set forth in advance in a written agreement negotiated at arm’s length.”
  • CMS has accepted the ACO into, and has not terminated the ACO from, the MSSP.
  • The tax-exempt organization’s share of economic benefits derived from the ACO is proportional to the benefits or contributions the tax-exempt organization provides to the ACO.
  • If the tax-exempt organization receives an ownership interest in the ACO, the ownership interest received is proportional and equal in value to its capital contributions to the ACO and all ACO returns of capital, allocations and distributions are made in proportion to ownership interests.
  • The tax-exempt organization’s share of the ACO’s losses does not exceed the share of ACO economic benefits to which the tax-exempt organization is entitled.
  • All contracts and transactions entered into by the tax-exempt organization with the ACO and the ACO’s participants, and by the ACO with the ACO’s participants and any other parties, are at fair market value.

Comments are due May 31.

Other ACO coverage from National Underwriter Life & Health:


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