AHLA. Clinically Integrated Organizations What They Are, How They Work, and What Tax Issues They Raise. Gerald M. Griffith Jones Day Chicago, IL

Transcription

1 AHLA Clinically Integrated Organizations What They Are, How They Work, and What Tax Issues They Raise Gerald M. Griffith Jones Day Chicago, IL Max Reiboldt Coker Group Alpharetta, GA Cynthia F. Wisner Associate Counsel Trinity Health Livonia, MI Tax Issues for Health Care Organizations October 19-21, 2014

2 Clinically Integrated Organizations AHLA Nonprofit Tax Program, Washington, D.C., October 20, 2014 Cynthia F. Wisner, CHE Trinity Health Max Reiboldt, Coker Group Gerald M. Griffith, Jones Day Any presentation by a Jones Day lawyer or employee should not be considered or construed as legal advice on any individual matter or circumstance. The contents of this document are intended for general information purposes only and may not be quoted or referred to in any other presentation, publication or proceeding without the prior written consent of Jones Day, which may be given or withheld at Jones Day's discretion. The distribution of this presentation or its content is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of Jones Day or its clients. Moreover, this outline does not purport to be an exhaustive review of all possible arguments in favor of or opposed to a particular tax position. 1 Overview Getting Started Identifying Goals and the Team Clinical Integration Principles PHOs revisited? Special Rules for MSSP ACOs Tax Considerations for structuring and operating other ACOs and CIOs Review of ACO Models Historical Perspective of PHOs and Ancillary Joint Ventures Status of Entity and Effect on Participants Incentive Distributions Capitalization and Expenses of the Entity Valuation Considerations 2 1

3 Goals of ACOs and CIOs Improve efficiency and quality of care Improve population health Contain the cost of health care services Develop more effective programs for management of chronic conditions Facilitate participation in government and third party payment programs Position hospitals, physicians and other providers for financial stability as payment mechanisms change 3 Assembling the Team Line up your internal resources to assist with information gathering and structuring Clinical and Quality Input Legal, Tax and Finance Others as needed Set up distribution lists and work plan with assigned responsibility and timelines Select external advisors and get them on board quickly Consider relevant experience, references, team orientation Internal support is critical Keep team/leadership informed throughout the process Understand what success would look like 4 2

4 Clinical Integration According to the FTC and DOJ clinical integration is " an active and ongoing program to evaluate and modify practice patterns by the network's physician participants and create a high degree of interdependence and cooperation among the physicians to control and ensure quality." The program may include: Establishing mechanisms to monitor and control utilization of health care services that are designed to control costs and assure quality of care; Selectively choosing network physicians who are likely to further these efficiency objectives and; The significant investment of capital, both monetary and human, in the necessary infrastructure and capability to realize the claimed efficiencies. 5 The PHO Craze Contracting vehicle, often non-risk bearing Messenger Model (Antitrust) Nonexclusive (Antitrust) Delegated credentialing from Payers Administer contracts, incentive programs on a fee for service basis Often 50/50 control, but hospital funded Included both independent and in many cases employed physicians 6 3

5 The PHO Craze Generally not qualify for exemption due to private benefit contracting provides to participating physicians Exception for integral part, tax-exempt faculty practice plan Generally not sufficient private benefit to jeopardize exemption UBI analysis focused on patient/non-patient test Private use analysis followed standard management contract analysis 7 Emerging ACO Models The following diagrams are examples of ACO models in place or under consideration Successful ACO models require: Administrative and actuarial review Comprehensive claims data and quality monitoring Integration and alignment of complementary programs, providers, and suppliers Robust health information exchanges 8 4

6 CMS/3 rd Party Payor ACO subcontract ACO Participation Agreement Group Practice ACO ACO subcontract Hospital Specialists Physician Group Model ACO 9 CMS/3 rd Party Payors ACO Participation Agreement IPA ACO Sub Contracts MD MD MD MD MD IPA Model ACO 10 5

7 CMS/3 rd Party Payors Hospital Member ACO Participation Agreement IPA Member PHO-ACO PHO Participation Agreement PHO Participation Agreement Hospital MD IPA Participation Sub Contracts MD MD MD Independent Physicians PHO Model ACO 11 CMS/3 rd Party Payors Contract ACO Participation Agreement Health System IDS ACO Hospital Physician Enterprise SNF HHA IDS Model ACO 12 6

8 CMS/3 rd Party Payors ACO Participation Agreement IDS Health System PHO PHO Participation Agreement IDS Health System, On Behalf of IDS Affiliated Providers PHO Participation Agreement Non-IDS Affiliated Providers Hospital Physician Enterprise SNF HHA Hybrid Model ACO 13 CMS/3 rd Party Payors ACO Participation Agreement IDS-ACO (on behalf of IDS Affiliated Providers) ACO Subcontracts Non-IDS Affiliated Providers Non-IDS Affiliated Providers Non-IDS Affiliated Providers IDS Subcontract Model ACO 14 7

9 Integrated Delivery System-Ultimate End Game Medical Staff Hospital Governing Board Substantial Physician Participation In Governance Physician Physician Provider Contracts Physician Physician Physician Committees Integrated Delivery System Coordinated Physician Input into all Phases of Integrated Delivery System Planning and Development Marketing To Employers Insurers HMOs, PPOs Physician Provider Contracts Provider Contract Claims Processing, Managed Care SNF Hospital TPA DME Home Health 15 Tax Effects of Participation in a Joint Venture Choice of entity may affect tax status of participants Are distributions to tax exempt participants UBI? Traditional two-prong test for UBI and Exemption Purposes test participation furthers exempt purposes Control test avoid inurement, act in furtherance of exempt purposes rather than to maximize profits 16 8

10 For-Profit/Nonprofit Joint Ventures UBI vs. Exemption Issue Substantial vs. Insubstantial Activity Fair market value terms No rule area since 2006 unless the issue is present in a Form 1023, Rev. Proc , MSSP ACO Waivers MSSP ACO must be a legal entity formed under applicable state, federal, or tribal law by one or more Medicare-enrolled health care service providers or suppliers that meet specified requirements. Tax waiver for MSSP ACO participants Covers funds to operate ACO Extends to ACO distributions Does not define the ACO as tax exempt Notice , I.R.B. 652 (April 18, 2011) 18 9

11 IRS Notice (5 Factors) Tax-exempt entity s participation will not result in private inurement, more than incidental private benefit or unrelated business income ( UBI ), if Terms of participation set in advance, written agreement negotiated at arm s length CMS-accepted MSSP ACO; activities limited to MSSP Economic benefits, ownership interest, return of capital, distributions and allocations are proportional in value to its capital contributions Share of losses does not exceed its share of economic benefits All contracts and transactions among the parties are consistent with fair market value 19 IRS Fact Sheet Modified the 5 factor test (MSSP ACOs only) Not all 5 factors are necessary to avoid inurement or private benefit and no one factor is determinative; heavy reliance on MSSP safeguards and CMS oversight for avoiding inurement, private benefit, UBI Maintains that control is relevant to whether an ACO furthers the charitable purposes of its exempt member(s) but defers to CMS oversight and MSSP rules for Medicare ACOs Ownership interests need not be directly proportional to capital contributions nor must shared savings necessarily be distributed in proportion to ownership interests Consider other economic benefits and in-kind contributions 20 10

12 IRS Fact Sheet Factors IRS would consider regarding impact of participation in a non-mssp ACO on exempt status (Q ): Whether participation furthers a charitable purpose (e.g., Medicaid ACO relieving poor and distressed; however, not all activities that promote health further charitable purposes) Whether the activities of the ACO are attributed to the tax-exempt participant (e.g., partnership vs. corporation) Whether the ACO activities represent an insubstantial part of the tax-exempt participant s total activities; unclear how measured Whether or not the ACO s activities result in inurement or impermissible private benefit Left open question of UBI from Non-MSSP ACOs; noted that some non-mssp ACO activities may be substantially related to charitable purposes; did not address private use issues 21 Helpful Hints from MSSP Guidance Lessening the burdens of government rationale was intended to limit the existing guidance to MSSPs, deferring decision on but not precluding commercial ACOs Medicaid enrollees are still a positive factor for a community-benefit based analysis ACO/CIO services must go beyond mere contracting and contract administration to active involvement in population health management All elements of value to the hospital and its community should be considered Valuing community benefit (Schedule H) Valuing access and quality improvement 22 11

13 Choice of Entity Limited Liability Company (LLC) (flow through of tax attributes and activities if treated as a partnership for federal tax purposes) Corporation Section 501(c)(3) Exempt Organization (to date, only for qualifying MSSP ACOs, long time line) Subchapter S Corporation (flow-through of tax benefits for non-exempt owners, but deemed UBI for exempt organization owners) Taxable (no flow through of tax attributes or activities, may be eligible for consolidated return) 23 Tax-exempt ACO Methodist Patient Centered ACO (Aug. 7, 2014) Boilerplate 501(c)(3) ruling for MSSP ACO Nonprofit hospital system founded the ACO and is the sole corporate member ACO governed by majority physician board 12 ACO Participants 1 physician employed by the system 1 Ph.D. representing the system 1 Medicare Beneficiary 24 12

14 Risk Bearing Entities IRS approach to managed care organizations generally IRC 501(m) commercial-type insurance UBI issue; also exemption issue if substantial Any form of coverage that is commercially available (broad definition) Prepaid services vs. insurance risk Incidental health insurance exception State insurance licensure Transfer and distribution of risk McCarran Ferguson Act 25 LLC Structure IRS likely to follow a patient/non-patient test similar to PHO guidance Avoiding UBI and, for substantial activities, preserving exemption Control by the exempt organization member(s) following traditional joint venture analysis Charitable purpose and fiduciary duty override Majority hospital board vs. right to remove Reserved powers vs. initiation rights Management authority vs. clinical Shared savings distributions tied to documented quality benchmarks and subject to audit 26 13

15 LLC Structure Insubstantial Activities Treat as an unrelated trade or business Pay UBIT on distributions except perhaps related to employed physicians Defining Substantiality (Historical) Lobbying Cases Withdrawn 501(m) audit guidelines Qualitative substantiality Is the CIN the sole or primary network for the hospital s managed care contracting activities? 27 The Taxable Solution Taxable nonprofit corporation No dividends or similar distributions to for-profit or individual members Flexibility for governance structure Corporate practice of medicine exception Insulate exemption (Moline Properties; Britt) Indirect Inuremet/Excess Benefit Effect of perennial losses, no appreciation and NOLs Quantitative approach to substantiality Does not resolve private use issue Same UBI questions for shared services 28 14

16 Governance Control Rev. Rul Community Board Standard Can be met by ultimate control by parent entity with a community board Clinical decisions can be delegated IDS rulings and former 20% safe harbor Ultimate control by system parent with a community board Physician Advisory Council Possible Techniques to Enhance Physician Representation on Board Reserved Powers (financial, contracting, structural) Appointment and Removal Rights (D&O, managers) Medical Foundation Famous two word question so what? 29 Private Benefit, Inurement and Excess Benefit Any private benefit (e.g., to participating physicians) must be incidental to the primary exempt purpose of the formation and operation of the ACO/CIO Quantitatively vs. Qualitatively Incidental Potentially closer scrutiny for physicians who are insiders/disqualified persons follow the money Physician groups and substantial influence Value of governance rights to do what? Distribution of shared savings commensurate with effort, value added Revenue sharing No excess benefit if FMV (no regulations) Structural inurement issue in theory 30 15

17 Private Use Private use includes ownership, lease or other use in a trade or business of a private party or in an unrelated trade or business of an exempt organization Framework for Analysis Determine whether ACO is using bond-financed property De minimis (bond covenants, other private use) Safe Harbors (Treas. Reg (b)(4); Rev. Procs & ) Priority Guidance Plan for (Aug. 26, 2014) Guidance regarding ACOs and private use Update to Rev. Proc regarding conditions under which management contracts do not result in private use 31 Private Use Management Contract Safe Harbors Compensation Maximum Term Minimum Termination Rights 95% or more is a fixed fee (i.e., set dollar amount per unit of time such as $X per month that may increase automatically based on a specified, Lesser of 15 years or 80% N/A of useful life of financed property objective, external standard such as changes in the CPI) plus one-time incentive fee payment 80% or more is a fixed fee plus one-time incentive fee payment 50% or more is a fixed fee, 100% capitated, or a combination of a capitation fee and a fixed fee 100% per unit fee (e.g., per read) or a combination of a fixed fee and a per unit fee; this includes bill and collect contracts where the PC bills patients or third parties directly 100% based on percentage of fees charged or a combination of a per unit fee and a percentage of revenue or expense (not both) fee During a start-up period only, compensation may be based on a percentage of either gross revenues, adjusted gross revenues, or expenses of a facility. Lesser of 10 years or 80% N/A of useful life of financed property 5 years On reasonable notice at end of 3 rd year 3 years On reasonable notice at end of 2 nd year 2 years On reasonable notice at end of 1 st year 2 years On reasonable notice at end of 1 st year 32 16

18 UBI Providing management services to unrelated parties is generally an unrelated trade or business Patient/non-patient test for PHOs based on which patients the administrative services support Dual Use Facilities (Treas. Reg (a)-1(c) & (d)) Debt-financed Property 33 Capitalization and Purchased Services ACO earns incentive payments Distributions typically are payments for services How are costs of ACO funded? Capital contributions Retained % of incentive payments Payment for ACO services from grants/insurers 34 17

19 Distributions and Incentive Plan Design Distributions for Services of ACO Participants Shared Savings/Risk Pools Quality Metrics Governance/Administrative Services Development of Processes/Protocols Negotiations with third party payors Other? 35 Reasonable Compensation Amount that would ordinarily be paid for like services in functionally comparable positions by similar organizations (whether taxable or taxexempt) under similar circumstances Current independent compensation surveys (same test for independence) and actual written offers from similar institutions competing for the services of the disqualified person Paid in return for valuable services not merely disguised distributions of profits 36 18

20 Incentive Compensation Not participate in management or control of organization; dealings are at arm s length Serves a real and discernible business purpose independent of any purpose to operate organization for benefit of the employee Amount of compensation dependent upon accomplishment of contract objectives not principally upon organization s revenues Actual operating results reveal no evidence of abuse or unwarranted benefits (e.g., manipulation of formula, non-market charges and costs), or safeguards exist to prevent such abuse Cap to avoid windfall based upon factors bearing no direct relationship to the level of service provided Personal productivity and inherent cap possible in ACO? 37 Valuation Considerations Key Challenges No historical precedent/still a relatively new phenomenon Compensation valuation alone is viewed as an emerging market Some guidance from OIG/CMS/IRS, but largely applicable to MSSPs, not commercial ACOs Valuation often pro-forma based Largely valuing structure vs. actual payouts 38 19

21 Valuation Considerations Market, Cost and Income Approaches Reasonable Cross Checks or Square Pegs for a Round Hole? Approach Income Rarely any actual cash flows to value Valuing a methodology/structure in advance, prior to any distributions actually occurring Market Limited, if any market data (no surveys publishing data on structure and amount of distributions from ACOs/CINs) Can use market physician compensation data to evaluate appropriateness of projected distributions Use MSSP guidance as a foundation, in terms of evaluating structure of distributions (is it market-based) Cost Evaluate potential distributions based on estimate of time spent in ACO/CIN activity Rely on time estimates, coupled with market-based hourly compensation data 39 Valuation Considerations Other Valuation Considerations: Distributions to hospital employed physicianshow does it affect their total cash compensation Multiple layers of valuation Connectivity of contributions with distributions Can you measure effectively? Single overall distribution model or multiple specialty/initiative specific distribution models Attribution of revenue/cost 40 20

22 Valuation Considerations Other Valuation Considerations: Timing of profit/loss vs. distributions Do physicians only share in upside (i.e., how are losses treated?) Is pure profitability required for distribution? Loss may have occurred in early years Roll-over of undistributed funds Are these retained by health system or part of subsequent years distribution? How does this affect FMV? 41 Valuation Considerations Need for a commercial reasonableness opinion what is it, who gives it and should you ask for one? Legal/operational/financial perspective All should contribute to documenting CR Scope of prohibition on taking into account volume or value of referrals in light of Tuomey, Bradford, Halifax and Infirmary Health. Finding value with lack of ROI, higher cost structure 42 21

23 CMS/3 rd Party Payors ACO Participation Agreement IDS-ACO (on behalf of IDS Affiliated Providers) ACO Subcontracts Non-IDS Affiliated Providers Non-IDS Affiliated Providers Non-IDS Affiliated Providers IDS Subcontract Model ACO 43 Distribution Illustration #1 Commercial ACO (Various Activities) Distribution based on revenue less expenses Single distribution method for all ACO participants (total of 503) Year One Distribution: Maximum distribution of $750 per participating provider Actual payout determined by: Completion of clinical integration education initiatives Data submission to ACO 44 22

24 Distribution Illustration #2 Commercial ACO (Shared Savings Model) Physicians share in 45% of shared savings Year One, no projected revenue but need to encourage participation Minimum distribution of $250 based on: Participation requirements Interface development between practice and ACO Ceiling on distributions in Year One due to unknowns of what actual revenue could be If no revenue, minimum distributions funded through debt/deducted from future distributions 45 Distribution Illustration #3 Commercial ACO (Shared Savings Model) Distribution pool determined after expenses deducted from any revenue Physicians share in 50%-75% of shared savings (varies by year) Physician Distribution model: Separate pools for primary care, hospitalists, emergency medicine given priority in the model, based on required activity Remaining monies split among all participating providers Sign-on bonus paid to all participating providers (deducted from distribution pool) 46 23

25 FAQs 1. What % of board members can be physicians if the ACO is seeking tax exemption? 2. What % of board members can be physicians before the $$ distributed are UBI? a. Does it matter if the $$ are paid for patient care improvements? 3. Do I need a FMV review of the amount distributed as incentive pay? a. Would a cap based on the % of payment for patient care help? 47 FAQs 4. Do the expenses of the ACO have to be paid before incentives are distributed? 5. Can the ACO make IT tools available or donate EMRs to the physician participants? a. Does it matter if the ACO is wholly owned and capitalized by a hospital? 48 24