Accountable Care Organization does not qualify for 501(c)(3) recognition, IRS rules

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1 Page 1 of 5 6/29/2016 April 22, Accountable Care Organization does not qualify for 501(c)(3) recognition, IRS rules In a final adverse determination letter (PLR ), the IRS has ruled that an organization (ORG) established as an accountable care organization (ACO) to assist an associated health care system, as well as participating unaffiliated physicians, to achieve goals set forth by the Affordable Care Act (ACA) fails to qualify for recognition of exemption under Section 501(c)(3) due to its substantial non-charitable activities. Facts and background ORG was incorporated as a nonprofit corporation to support "System," a public charity healthcare corporation recognized as exempt under Section 501(c)(3). Specifically, ORG was formed to assist System in achieving clinical care integration, coordination and accountability. ORG filed an application for recognition of exemption under Section 501(c)(3) and for public charity status under Section 509(a)(3) as a supporting organization to the System. ORG stated that it is an ACO, but that it does not participate in the Medicare Shared Savings Program (MSSP). 1 ORG does not directly provide healthcare services to the public, but instead dedicates itself to the furtherance of the "Triple Aim" health care reform goals established by the ACA: (1) reducing the cost of care for individuals, (2) improving patient access to and quality of care, and (3) improving population health and patient experience. ORG has formed an integrative network of healthcare providers, both System-affiliated and unaffiliated independent providers. ORG is developing performance measures and data infrastructure to assess care delivery of participating providers. It also is developing incentives to motivate improvements by participating providers in achieving Triple Aim goals. In addition, ORG acts as representative for all participating providers in the negotiation and execution of certain agreements with third-party Population Health Management/ACOs - 1

2 Page 2 of 5 6/29/2016 payers. These agreements link rewards and penalties for participants to their achievement of performance measures to incentivize changes in participant behavior in furtherance of the Triple Aim goals. Ruling and analysis To qualify for recognition of exemption under Section 501(c)(3) and the accompanying regulations, an organization must be both organized and operated exclusively for one or more specified charitable purposes. Organizations may engage in activities that do not further an exempt purpose to an incidental degree without jeopardizing tax exemption, but any single substantial nonexempt purpose destroys an organization's exemption. While lessening the burdens of government is a specified exempt charitable purpose, there must be an objective manifestation that the government considers the activities to be its burden. The IRS noted that the ACA encourages ACOs and established the MSSP (to be conducted through ACOs) to promote quality improvements. Accordingly, the IRS stated in Notice that participation of an ACO in an MSSP will generally further the charitable purpose of lessening the burdens of government. In PLR , however, the IRS explained that there is no objective manifestation in the ACA providing that the government considers non-mssp activities by ACOs to be its burden regardless of whether such ACOs are pursuing Triple Aim goals. Unlike ACOs participating in MSSPs, the IRS noted, there is no government oversight of ORG's activities. Promoting health is also a recognized charitable purpose, but not all activities that promote health further charitable purposes under Section 501(c)(3). While the Triple Aim goals set forth by the ACA and adopted by ORG generally promote health, the IRS concluded that not all its activities advancing those goals are necessarily in furtherance of charitable purposes under Section 501(c)(3). Furthermore, the IRS determined, based on ORG's application materials, that the negotiation of payer agreements including on behalf of participating physicians that are not affiliated with System is a substantial part of ORG's activities. The IRS stated that negotiating with private health insurers on behalf of unrelated providers is not a charitable activity, regardless of whether the activity is aimed at achieving cost savings in health care delivery. Moreover, the IRS concluded that the negotiation of these agreements offers more than an incidental private benefit to non-system affiliated providers. The IRS ruled that this substantial nonexempt purpose prevents ORG's recognition of exemption under Section 501(c)(3), regardless of any other charitable activities it may conduct. Finally, even if ORG did qualify for Section 501(c)(3) exemption recognition, the IRS stated that it would not qualify for public charity status as a Population Health Management/ACOs - 2

3 Page 3 of 5 6/29/2016 supporting organization under Section 509(a)(3), because it provides networking and contracting activities on behalf of non-system healthcare providers, which activities do not exclusively benefit System. Implications This IRS denial letter is the first public guidance the IRS has issued regarding non-mssp ACOs. In PLR , the IRS found that an ACO providing services to non-mssp providers neither lessens the burdens of government nor promotes the health of the community to further charitable purposes under Section 501(c)(3). A number of tax-exempt health care organizations have already instituted non-mssp ACO programs as part of their operations, taking the position that such ACO activity furthers the goals of the ACA and therefore furthers their tax-exempt charitable purposes. The IRS denial letter suggests potential difficulty with this position and may provide an obstacle for non-mssp ACOs seeking Section 501(c)(3) tax-exempt status. Further, it signals that the IRS might view similarly structured activities as being unrelated trade or business activity or potentially threating the exempt status of an organization that runs such a program as part of its activities or through a partnership. Tax-exempt organizations participating or considering participating in non-mssp ACOs, should review those activities in light of PLR Improper structuring of an ACO's or health care organization's independent physician contracts could jeopardize the tax-exempt status of the ACO, result in prohibited private benefit or inurement to participating providers, and/or result in unrelated business taxable income from ACO activity. The IRS had previously released guidance on which tax-exempt organizations can rely when participating in MSSP ACOs. In Notice , the IRS discussed its expectations for how existing tax guidance would apply to tax-exempt organizations participating in the MSSP through ACOs. See Tax Alert {}. Additionally, in November 2011, CMS released final regulations on the MSSP and ACOs. The IRS concurrently released a fact sheet with guidance for tax-exempt organizations participating in the MSSP through ACOs. See Tax Alert {}. It remains unclear whether and when furthering the "Triple Aim" goals of the ACA would further tax-exempt charitable purposes; whether an ACO with a dual-use purpose (participating in MSSP as well as negotiating contracts between independent physicians and commercial payers) or a health care system-related ACO that served only providers within the system could qualify for exemption under Section 501(c)(3). Please contact your EY tax practitioner for further information. Population Health Management/ACOs - 3

4 Page 4 of 5 6/29/2016 RELATED RESOURCES For more information about EY's Exempt Organization Tax Services group, visit us at Contact Information For additional information concerning this Alert, please contact: Tax-Exempt Organizations Group Mike Vecchioni (313) Steve Clarke (202) Mike Payne (602) Erica Yike (216) Other Contacts Exempt Organizations Tax Services Markets and Region Leadership Scott Donaldson, Americas Director Phoenix (602) Mark Rountree, Americas Markets Leader Dallas (214) Bob Lammey, Americas Higher Education Markets Leader Boston (617) Lucille White, Central Region Chicago (312) Bob Vuillemot, Northeast Region Pittsburgh (412) Debra Heiskala, West Region San Diego (858) Joyce Hellums, Southwest Region Austin (512) Kathy Pitts, Southeast Region Birmingham (205) ENDNOTES 1 The ACA directed the Department of Health and Human Services (HHS) to establish the MSSP to promote accountability for care of Medicare beneficiaries, improve the coordination of Medicare fee-for-service items and services, and encourage investment in infrastructure and redesigned care processes for high quality and efficient service delivery. Groups of health care service providers and suppliers that have established a mechanism for Population Health Management/ACOs - 4

5 Page 5 of 5 6/29/2016 shared governance and that meet certain criteria specified by HHS are eligible to participate as ACOs under the program. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. Copyright , Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Population Health Management/ACOs - 5

6 February 22, 2016 Tax Alert Accounting Methods & Inventories Health Sciences Accountable Care Organization's shared savings program income is not determinable at end of tax year In CCA , the IRS Office of Chief Counsel has concluded that the income that an Accountable Care Organization (ACO) will receive from the Medicare Shared Savings Program (MSSP) is not fixed or determinable at the end of the tax year in which the services are provided. Background The Affordable Care Act (ACA) directed the Department of Health and Human Services (HHS) to establish the MSSP to promote accountability for care of Medicare beneficiaries, improve the coordination of Medicare fee-for-service items and services, and encourage investment in infrastructure and redesigned care processes for high quality and efficient service delivery. Groups of health care service providers and suppliers that have established a mechanism for shared governance and that meet certain criteria specified by HHS are eligible to participate as ACOs under the program. In November 2011, the Centers for Medicare & Medicaid Services (CMS), the agency within HHS that administers the Medicare program, released final regulations addressing the MSSP. The final rules establish the new voluntary MSSP to provide incentives for participating health care providers that agree to work together and become accountable for coordinating care for patients. Providers who coordinate care through this program and meet certain quality standards may share in savings they achieve for the Medicare program. The regulations set forth certain "programmatic factors" for ACOs, stating that the Secretary of HHS must: (1) establish an expenditure benchmark, (2) compare the benchmark to the assigned beneficiary per capita Medicare expenditures in each performance year during the term of the agreement to determine the amount of any savings, (3) establish the appropriate minimum savings rate and determine the appropriate sharing rate for ACOs that have generated savings against the benchmark, and (4) determine the required sharing cap on the total amount of shared savings that may be paid to an ACO. Chief counsel's advice The IRS Chief Counsel's Office (IRS) analyzed a claim by a taxpayer operating as an ACO that the amount of the MSSP payments that it will receive is contingent on factors that are not determinable at the end of the tax year. The IRS noted that, under Reg. Section (c)(ii), accrual-method taxpayers recognize income "when all the events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy." The IRS agreed that, due to the MSSP programmatic factors, not all events fixing the Taxpayer's right to receive the income will have occurred during the performance year, and the amount to be received is not determinable with reasonable accuracy at the end of the year. Population Health Management/ACOs - 6

7 To be eligible to receive MSSP payments, the IRS explained, an ACO must meet quality performance standards established by HHS/CMS and demonstrate that it has achieved savings against an appropriate benchmark of expected average per capita expenditures. Because of the timeline of the application of the programmatic factors, the taxpayer will be unable to determine at the end of the tax year if it has achieved the necessary savings to participate in the MSSP. For instance, the IRS noted that the beneficiaries used to determine an ACO's performance are assigned retroactively, and the performance benchmark is not determined until six months after the performance year ends. For the same reasons, in addition to the right to receive the income not being fixed at the end of the tax year, the IRS determined that the amount the taxpayer can expect to receive from the MSSP cannot be determined with reasonable certainty at the end of the tax year. Implications This Chief Counsel Memorandum clarifies when accrual-method taxpayers should include MSSP payments in gross income. ACO providers receive Medicare shared savings payments if the ACO meets quality performance standards as determined by HHS. This determination is based on a calculation that considers performance data of certain Medicare beneficiary treatment during the tax year. The performance benchmark is not, however, determined until approximately six months after the performance year ends. Prior to this time, the taxpayer will not know if the goal has been reached or whether there is any Medicare savings to be distributed. Accrual-method taxpayers include payments as gross income when they have a fixed right to receive the income and the amount can be determined with reasonable accuracy. There is a fixed right to receive the income when any material contingencies on the taxpayer's eventual receipt of income are removed. The amount can be determined with reasonable accuracy when a reasonable basis for calculation exists. With this memorandum, the IRS has determined that these criteria cannot be recognized within the tax year. Receipt of any payment and payment calculation are both contingent upon determinations that occur after the close of the tax year. Accrual taxpayers should not, at this time, include MSSP payments in gross income in the year the services are provided. MSSP payments should be distinguished from traditional fee-for-service Medicare payments during the course of the year. Organizations should continue to account for these payments separate from MSSP payments. Further, fiscal-year tax filers should be aware of when HHS determines the MSSP performance benchmark so the payments are included in the correct filing year. Please contact your EY professional for further information. Contact Information For additional information concerning this Alert, please contact: Health Sciences Group Mike Payne (602) Scott Tidwell (858) Mike Vecchioni (313) Accounting Methods & Inventories Group Jack Donovan (202) Population Health Management/ACOs - 7

8 Other Contacts Health Sciences Markets and Region Leadership Scott Donaldson, Americas Director Phoenix (602) Mark Rountree, Americas Markets Leader Dallas (214) Bob Lammey, Americas Higher Education Markets Leader Boston (617) Lucille White, Central Region Chicago (312) Bob Vuillemot, Northeast Region Pittsburgh (412) Debra Heiskala, West Region San Diego (858) Joyce Hellums, Southwest Region Austin (512) Kathy Pitts, Southeast Region Birmingham (205) The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. Copyright , Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Population Health Management/ACOs - 8

9 Office of Chief Counsel Internal Revenue Service Memorandum Number: Release Date: 2/12/2016 CC:ITA:B02:HFRogers POSTF UILC: , date: October 20, 2015 to: Associate Area Counsel (Jacksonville) (Large Business & International) David D. Duncan Attorney (Jacksonville) (Large Business & International) from: Associate Chief Counsel (Income Tax & Accounting) Thomas D. Moffitt Branch Chief, Branch 2 (Income Tax & Accounting) subject: Whether the amount of income a taxpayer will receive pursuant to the Medicare Shared Savings Program regulations is fixed and can be determined with reasonable accuracy. This Chief Counsel Advice responds to your request for assistance dated July 21, This advice may not be used or cited as precedent. LEGEND Taxpayer Business A B C D E F Population Health Management/ACOs - 9

10 R S T ak al am Year Year Year Year ! # = & % $ ^ ISSUE Whether the amount of income the Taxpayer will receive from Medicare pursuant to the Medicare Shared Savings Program regulations is fixed prior to the year of notification of shared savings. CONCLUSION Due to programmatic factors, the amount of income that the Taxpayer will receive from Medicare pursuant to the Medicare Shared Savings Program regulations is not fixed at the end of the taxable year in which patient services are provided. These factors are resolved and the amount of income is fixed and determinable with reasonable accuracy when the taxpayer is notified of shared savings, which is approximately seven to ten months after the close of the taxable year in which patient services are provided. FACTS 1. Taxpayer Taxpayer is in the F business, operating primarily in Business. During tax years Year 3 and Year 4, Taxpayer started! B to operate as Accountable Care Organizations (ACOs) under the Affordable Care Act (ACA) throughits C indirect holding company, A. A is a disregarded entity for federal tax purposes and is included on Taxpayer s consolidated federal income tax return. An ACO, is an organization of health care providers that agrees to be accountable for the quality, cost, and overall care of Medicare beneficiaries who are enrolled in the Population Health Management/ACOs - 10

11 traditional fee-for-service program who are assigned to it. See generally, Notice , I.R.B. 652 (addressing the participation of tax-exempt organizations in ACOs). Taxpayer established#types ofacos:bacos andac ACO. For theb ACOs, there are usually # B in each B: A and an D that has more than + Medicare patients. Taxpayer established = ACOs with a collective & beneficiaries assigned that have an R, start date, an additional % ACOs with a collective ^ beneficiaries assigned that have a S, start date, and an additional $ ACOs with a beneficiaries that have a T, start date. For the C corporate ACO, Taxpayer, through A, established a corporate ACO, E. 2. Accountable Care Organizations & Medicare Shared Savings Program Taxpayer, through A and its various ACOs, is participating in the Medicare Shared Savings Program (Shared Savings Program) described in 3022 of the Patient Protection and Affordable Care Act, Pub. L , 124 Stat. 119 (ACA), enacted on March 23, Section 3022 of the ACA amends Title XVIII of the Social Security Act (SSA) (42 U.S.C.1395 et seq.) by adding new 1899, which directs the Secretary of the Department of Health and Human Services (HHS) to establish the Shared Savings Program to promote accountability for care of Medicare beneficiaries, improve the coordination of Medicare fee-for-service (FFS) items and services, and encourage investment in infrastructure and redesigned care processes for high quality and efficient service delivery. Under 1899(b)(1) of the SSA, groups of health care service providers and suppliers that have established a mechanism for shared governance and that meet criteria specified by the Secretary are eligible to participate as ACOs under the program. The Shared Savings Program is a voluntary program in which ACOs accept responsibility for the overall quality, cost and care of a defined group of FFS beneficiaries for at least a three year agreement period. Under the program, ACOs are accountable for a minimum of 5,000 FFS beneficiaries. The ACO must define processes to promote evidence-based medicine and patient engagement, monitor and evaluate quality and cost measures, meet patient-centeredness criteria and coordinate care across the care continuum. Medicare service providers and suppliers participating in an ACO will continue to receive FFS payments in the same manner as such payments would otherwise be made; however, an ACO that meets quality performance standards established by the Secretary and demonstrates that it has generated savings against an appropriate benchmark of expected average per capita FFS expenditures will be eligible to share in savings earned, if the generated savings meet or exceed the minimum savings threshold under 1899(d)(2) of the SSA. Quality reporting occurs after the performance year, as described later. Section 1899(i) of the SSA also authorizes the use of other payment models that the HHS Secretary determines will improve the quality and efficiency of items and services of Medicare. Population Health Management/ACOs - 11

12 Section 1899(d)(1)(B)(ii) of the SSA requires the Secretary to establish and update the benchmark for each agreement period for each ACO using the most recent available 3 years of per-beneficiary expenditures for parts A and B services for Medicare fee-for-service beneficiaries assigned to the ACO. This section also requires the benchmark to be adjusted for beneficiary characteristics and such other factors as the Secretary determines appropriate and updated by the projected absolute amount of growth in national per capita expenditures for Parts A and B services under the original Medicare fee-for-service service program, as estimated by the Secretary. A new benchmark is to be established consistent with these requirements at the beginning of each new agreement period. Section 1899(d)(2) of the SSA provides that, if the ACO meets the quality performance standards established by the Secretary, a percent (as determined appropriate by the Secretary) of the difference between such estimated average per capita Medicare expenditures in a year, adjusted for beneficiary characteristics, under the ACO and such benchmark for the ACO may be paid to the ACO as shared savings and the remainder of such difference shall be retained by the program under this title. This percentage is referred to as the savings rate. This section also requires the Secretary to establish limits on the total amount of shared savings that may be paid to an ACO. This limit is referred to as the sharing cap. Thus, to implement the provisions of section 1899(d) of the SSA for determining and appropriately sharing savings, the Secretary must make a number of determinations about the specific design of the shared savings methodology described by the statute. The Secretary promulgated regulations, after notice and comment, to implement these determinations. 3. The Shared Savings Program Regulations On November 2, 2011, the regulations concerning the Shared Savings Program were finalized at 42 C.F.R. 425, effective January 3, 2012, in order to implement the provisions set forth in section 3022 of the ACA 1. The regulations set forth the rules and regulations necessary for Centers for Medicare and Medicaid Services (CMS) to establish the Shared Savings Program and provide the calculation for the earned shared savings payments. In the regulations, the Secretary addressed the following programmatic factors for ACOs. First, the Secretary must establish an expenditure benchmark, which involves determining: (1) the patient population for whom the benchmark is calculated; (2) appropriate adjustments for beneficiary characteristics such as demographic factors and/or health status that should be taken into account in the benchmark; (3) whether any other adjustments to the three-year benchmark are warranted so as to provide a level playing field for all participants; and (4) appropriate methods for trending the three-year benchmark forward to the start of the agreement period 1 These rules were updated June 9, 2015, and modified Track 2 MSR/MLR, added a new Track 3, and modified the way the benchmark is reset at the beginning of a second or subsequent agreement period if the ACO chooses to renew. The basic benchmarking methodology remains the same. Population Health Management/ACOs - 12

13 and for subsequently updating the benchmark for each performance year during theterm oftheagreement withtheaco. Second, the Secretary must compare the benchmark to the assigned beneficiary per capita Medicare expenditures in each performance year during the term of the agreement in order to determine the amount of any savings. Third, the Secretary must establish the appropriate minimum savings rate (MSR), as required by the statute to account for normal variation in expenditures based upon the number of FFS beneficiaries assigned to an ACO; then, the Secretary must determine the appropriate sharing rate for ACOs that have generated savings against the benchmark and meet or exceed the MSR. While the ACOs can generate savings, they can only realize them if they meet the quality performance standard. Finally, the Secretary must determine the required sharing cap on the total amount of sharedsavings thatmaybepaidtoanaco. The programmatic factors adopted in the regulations and impacting the status of a taxpayer s right to a shared savings payment and the determination of the amount of the payment, if any, on December 31 of the performance year are as follows: 1. Timing of data used for retroactive reconciliation impacts knowledge of the final sharing rate and performance payment. a. The beneficiaries used to determine an ACO s performance are a subset of those FFS beneficiaries seen by ACO practitioners and are assigned retroactively, after a three month claims run-out for the performance year. 2 In the June 9, 2015 rule, Track 3 was implemented with prospective assignment. There is minor reconciliation at the end of the year of the prospective list (e.g., removing beneficiaries that are not FFS beneficiaries anymore.) b. The MSR in Track 1 is dependent on the number of assigned beneficiaries and knowable only after the final number of assigned beneficiaries is determined. ACOs must meet or exceed the MSR in order to be eligible to share in savings generated. * In the June 9, 2015 rule, the MSR was not modified for Track 1. For Track 2, the MSR/MLR was modified. The ACOs in Tracks 2 and 3 have a menu of symmetrical choices. c. The CMS Office of the Actuary provides data (e.g., the statutory update amount to the benchmark) approximately six months after the performance year has ended. d. The beneficiary per capita costs for the performance year are determined retrospectively, after a three month claims run-out. 2. ACOs are not closed systems. 2 The 2012 regulations provided for two Tracks of ACO s. Track 1, the shared savings track, and Track 2 a shared savings and loss track. CMS published a proposed rule on December 8, 2014, for the Medicare Shared Savings Program. This rule was finalized June 9, Population Health Management/ACOs - 13

14 a. Because FFS beneficiaries are likely to receive care outside the care rendered to them by ACO practitioners, the ACO may not have knowledge of all FFS claims billed for their assigned beneficiaries. While CMS shares a great deal of claims data with the ACO throughout the course of the year, including claims from providers unaffiliated with the ACO so that the ACO can get a more complete picture of the beneficiary s care throughout the course of the year, claims are not necessarily complete by December 31. There is a claims run out to make them complete and CMS is required to withhold certain claims, plus the availability of the claims is dependent on when the providers submit them. 3. Quality performance impacts the final savings rate. a. CMS derives a sample of beneficiaries on which the ACO must report quality. The ACO receives this sample after the performance year ends. The ACOs quality report is submitted in February or March. They cannot qualify for savings, even if generated, unless they meet the quality standard. CMS assesses that after the reporting is over. b. In performance years 2 and 3, the sharing rate depends on the ACO s performance on certain measures. CMS determines the final sharing rate based on quality performance approximately six months after the performance year has ended. 4. Taxpayer s Position Taxpayer states that the actual amount of the Shared Savings Program payment is contingent upon factors that are not ultimately determinable until the end of the contract term. Additionally, Taxpayer does not believe the information currently provided by CMS is sufficient and reliable for purposes of calculating Shared Savings Program payments. The reason for Taxpayer s uncertainty includes: The beneficiary population is subject to change; the final performance year benchmark for the ACOs is subject to change; the actual average per capita performance year Medicare expenditures for the beneficiary population for the ACOs is subject to change; the achievement of performance quality standards is unknown until after the tax year ends; the impact of the opt out beneficiaries on the calculation is unknown until after the tax year ends; the actual per capita expenditures for the beneficiary population related to claims for drug and alcohol is subject to change; and the information received from Medicare has contained errors and been unreliable. Based on Taxpayer s understanding, the ACOs would not receive the final determination of savings or receive any payment until sometime in ak or al of Year 1 for the savings generated in the first performance year, which includes the short period of am. In Year 3, the benchmarks were not yet set by Medicare for the ACO, so there was no way to determine if Taxpayer had generated any savings. Taxpayer recognized no income in Year 3. In Year 4, Medicare established benchmarks; however, as detailed above, based on the uncertainty of the amount, Taxpayer will not include any income from these operations in their financial statements for Year 4, nor Population Health Management/ACOs - 14

15 shared savings income on the B returns for Year 4. Taxpayer intends to report the MSSP payment on its Year 1 federal income tax return (the year of receipt of payment). LAW AND ANALYSIS Section 451 of the Internal Revenue Code provides the general rule that the amount of any gross income shall be included in gross income for the taxable year in which received by the taxpayer, unless such amount is to be properly accounted for in a different period. Accrual method taxpayers recognize income when all the events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy. Section (c)(ii) of the Treasury Regulations. Due to the programmatic factors set forth above, we do not believe that all events have occurred which fix the Taxpayer s right to receive the income during the performance year. Further we do not believe the Taxpayer can determine the amount with reasonable accuracy at the end of the performance year due to the programmatic factors. Legal analysis 1. Fixed right to receive the income Ordinarily, a taxpayer s right to income is fixed under the all events test when either the amount is unconditionally due or the taxpayer has performed. The general rule states that all the events that fix the right to receive income occur when (1) the required performance takes place, (2) payment is due, or (3) payment is received, whichever happens first. See Schlude v. Commissioner, 372 U.S. 128, 133, n.6 (1963); Rev. Rul , C.B In order to be fixed, any material contingencies on the taxpayer s eventual receipt of income must have been removed. Standard Lumber Co. v. Commissioner, 35 T.C. 192, 198 (1960), acq. on this issue, C.B. 5, aff d on another issue, 299 F.2d 382 (9 th Cir. 1962). Health care service providers and suppliers participating in an ACO continue to receive FFS payments in the same manner as such payments would otherwise be made. Therefore, they will continue to be paid for their services in the same way they had always been. However, in order to be eligible to receive payments for Medicare share savings, the income at issue, an ACO must meet quality performance standards established by HHS/CMS and demonstrate that it has achieved savings against an appropriate benchmark of expected average per capita FFS expenditures. Because of the first two programmatic factors, the Taxpayer cannot be assured at the end of its taxable year that it will have achieved the necessary savings to participate in the Shared Savings program. For instance, the beneficiaries used to determine an ACO s performance are assigned retroactively, after a three month claims run-out. The MSR is dependent on the number of assigned beneficiaries and, during the tax years at issue, knowable only after the final number of assigned beneficiaries is determined. 3 The benchmark of expected average per capita FSS expenditures is determined 3 This remains true for Track 1. This is not accurate for Track 2 and 3 after the June 9, 2015 rule. Population Health Management/ACOs - 15

16 approximately six months after the performance year ends. The beneficiary per capita costs for the performance year are determined retrospectively, after the three month claims run-out, and can include FFS claims billed by other practitioners if the FFS beneficiaries received care outside the care rendered to them by the ACO practitioners. At the conclusion of their tax year, the ACO practitioners may not have knowledge of all of the other FFS claims. Because of the above programmatic factors, at the close of its taxable year, the Taxpayer is unable to determine if it will have achieved the necessary savings to participate in the Shared Savings Program. The amount is not fixed as it is not unconditionally due. 2. Amount can be determined with reasonable accuracy The second requirement for accrual under the all events test is that the amount of income be determinable with reasonable accuracy. It is not necessary that the exact amount be known, income is accruable if a reasonable basis for calculation exists. George K. Herman Chevrolet, Inc. v. Commissioner, 39 T.C. 846, 850 (1963) ( while the word accuracy means exactness or precision, when used with reasonable it implies something less than an exact or completely accurate amount ) Adjustments are made in the year of actual receipt. Section (b). The determination of whether amounts are accruable under the all events test is made on the basis of information available to the taxpayer at the end of the year. This is a factual determination. See Crescent Wharf & Warehouse Co. v. Commissioner, 518 F.2d 772, 775 (9 th Cir. 1975). If there is agreement on the general basis under which the amount due is to be calculated, accrual is generally required. The following are some cases where it was determined that income had to be accrued. Continental Tie & Lumber Co. v. United States, 286 U.S. 290 (1932) [railroad had to accrue income in 1920 when a Congressional act gave railroads in its situation the right to compensation based on a formula comparing its results from operations during the period concerned with it results from operations during a base period); Food Machine & Chemical Corporation v. United States, 286 F.2d 177 (Ct. Cl. 1960) (tentative agreement on formula to calculate compensation due for cancellation of contract); Cappel House Furnishing Co. v. United States, 244 F.2d 525 (6 th Cir. 1957) (amount of insurance award for lost business based largely on past experience was reasonably determinable); Marquardt Corporation v. Commissioner, 39 T.C. 443, (1962) (amounts due under contracts providing for negotiation as to reasonable compensation and complete adjustment of payment after audit of all amounts due were reasonably ascertainable). However, where there is a dispute over the method of calculation, or if there is no objective standard to be used in making the calculation, the amount is not ascertainable with reasonable accuracy. See Globe Corporation v. Commissioner, 20 T.C. 299, 304 (1953), acq., C.B. 4 (where contracts called for later fixing of a fair and equitable amount, the amount was too uncertain to accrue because there was no formula, method or particular data which both could accept as the basis of the final Population Health Management/ACOs - 16

17 agreement); Blake v. Commissioner, 615 F,2d 731 (6 th Cir. 1980) (no accrual on patent infringement claim when special master had not determined a reasonable royalty rate). If the facts from which a calculation can be made are established as of the end of the tax year, the amount is accruable even though the calculation may not be made until afterwards. Rev. Rul , C.B. 112, demonstrates this principle in a case involving Medicaid payments. In Rev. Rul , the taxpayer ran a nursing home and was entitled to Medicaid payments. The taxpayer was entitled to compensation equal to the reasonable costs incurred by the taxpayer in rendering nursing home care plus a ten percent return on equity capital as a profit factor. The taxpayer billed the government monthly on the basis of a tentative rate based upon the projected reasonable cost of providing patient care during the year. After the close of the year, the taxpayer submitted cost reports to the government. Any refund owed the government needed to be submitted with the cost report. Any amount due to the taxpayer was made upon settlement of a desk audit performed by the health department. The Service ruled that the amounts eventually claimed on the cost sheets should be reflected in the taxpayer s income for the year because all the facts necessary for the computation were fixed as of the close of the tax year. In the instant case, the facts from which a calculation could be made were not knowable at the end of the tax year. At the end of the tax year, the Taxpayer did not know the beneficiaries used to determine its performance as those beneficiaries were not assigned until after a three month claims run-out after the close of the performance year. The MSR is dependent on the number of assigned beneficiaries and knowable only after the final number of assigned beneficiaries is determined. The performance benchmark is determined approximately six months after the performance year ends. The beneficiary per capita costs are determined after the three month claims run-out. The Taxpayer is given the sample of beneficiaries for whom it must report quality performance on certain measures after the close of the performance year and this quality performance impacts the final savings rate. Thus, at the close of its taxable year, the amount of income, if any, the Taxpayer will receive from the Shared Savings Program is not fixed. Further, the amount cannot be determined with reasonable certainty. Please call (202) if you have any further questions. Andrew J. Keyso, Jr. Associate Chief Counsel (Income Tax & Accounting) Thomas D. Moffitt Branch Chief, Branch 2 Office of Associate Chief Counsel (Income Tax & Accounting) Population Health Management/ACOs - 17

18 NOTICE The Internal Revenue Service (IRS) is considering the application of the provisions of the Internal Revenue Code (Code) governing tax-exempt organizations to hospitals or other health care organizations that are recognized as organizations described in 501(c)(3) of the Code (referred to herein as tax-exempt organizations ) participating in the Medicare Shared Savings Program (MSSP) described in 3022 of the Patient Protection and Affordable Care Act, Pub. L , 124 Stat. 119 (Affordable Care Act), enacted March 23, Accordingly, the IRS is soliciting comments as to whether existing guidance relating to the Code provisions governing tax-exempt organizations is sufficient for those tax-exempt organizations planning to participate in the MSSP through an accountable care organization (ACO) and, if not, what additional guidance is needed. The IRS is also soliciting comments concerning whether guidance is needed regarding the tax implications for tax-exempt organizations participating in activities unrelated to the MSSP, including shared savings arrangements with commercial health insurance payers, through ACOs. BACKGROUND ON ACOS AND THE MSSP Section 3022 of the Affordable Care Act amends Title XVIII of the Social Security Act (SSA) (42 U.S.C et seq.) by adding a new 1899, which directs the Secretary of the Department of Health and Human Services (HHS) to establish a Medicare shared savings program that promotes accountability for care of Medicare beneficiaries, improves the coordination of Medicare fee-for-service items and services, and encourages investment in infrastructure and redesigned care processes for high quality and efficient service delivery. Under 1899(b)(1) of the SSA, groups of health care service providers and suppliers that have established a mechanism for shared governance and that meet criteria specified by HHS are eligible to participate as ACOs under the program. Section 1899(b)(1) of the SSA provides examples of groups of service providers and suppliers that may form an ACO, including (i) physicians and other health care practitioners (ACO professionals) in a group practice, (ii) a network of individual practices, (iii) a partnership or joint venture arrangement between hospitals and ACO professionals, and (iv) a hospital employing ACO professionals. ACOs eligible to participate in the MSSP will manage and coordinate care for their assigned Medicare fee-for-service beneficiaries. Health care service providers and suppliers participating in an ACO will continue to receive Medicare fee-for-service payments in the same manner as such payments would otherwise be made. In addition, an ACO that meets quality performance standards established by HHS and demonstrates that it has achieved savings against an appropriate benchmark of expected average per capita Medicare fee-for-service expenditures will be eligible to receive payments for Medicare shared savings (MSSP payments) under 1899(d)(2) of the SSA. 1 Population Health Management/ACOs - 18

19 Section 1899(i) of the SSA also authorizes the use of other payment models that the HHS Secretary determines will improve the quality and efficiency of items and services for Medicare. Section 1899(b)(2) of the SSA establishes the following requirements for an ACO to participate in the program: (1) The ACO shall be willing to become accountable for the quality, cost, and overall care of the Medicare fee-for-service beneficiaries assigned to it. (2) The ACO shall enter into an agreement with the HHS Secretary to participate in the program for not less than a 3-year period (the MSSP agreement period). (3) The ACO shall have a formal legal structure that would allow the organization to receive and distribute payments for shared savings under 1899(d)(2) to participating providers of services and suppliers. (4) The ACO shall include primary care ACO professionals that are sufficient for the number of Medicare fee-for-service beneficiaries assigned to the ACO under 1899(c). At a minimum, the ACO shall have at least 5,000 such beneficiaries assigned to it under 1899(c) in order to be eligible to participate in the MSSP. (5) The ACO shall provide the HHS Secretary with such information regarding ACO professionals participating in the ACO as the Secretary determines necessary to support the assignment of Medicare fee-for-service beneficiaries to an ACO, the implementation of quality and the other reporting requirements under 1899(b)(3), and the determination of payments for shared savings under 1899(d)(2). (6) The ACO shall have in place a leadership and management structure that includes clinical and administrative systems. (7) The ACO shall define processes to promote evidence-based medicine and patient engagement, report on quality and cost measures, and coordinate care, such as through the use of telehealth, remote patient monitoring, and other such enabling technologies. (8) The ACO shall demonstrate to the HHS Secretary that it meets patient-centeredness criteria specified by the Secretary, such as the use of patient and caregiver assessments or the use of individualized care plans. Section 1899(b)(3) of the SSA requires the HHS Secretary to establish quality performance standards to assess the quality of care furnished by ACOs and requires ACOs to report data, in a form and manner specified by the HHS Secretary, on measures the Secretary determines necessary to evaluate the quality of care furnished by the ACO. Section 1899(d)(3) of the SSA requires the 2 Population Health Management/ACOs - 19

20 HHS Secretary to monitor ACOs for avoidance of at-risk patients. If the HHS Secretary determines that an ACO has taken steps to avoid at-risk patients to reduce the likelihood of increasing costs to the ACO, the Secretary may impose appropriate sanctions, including termination from the MSSP. On March 31, 2011, the Centers for Medicare & Medicaid Services (CMS), the agency within HHS that administers the Medicare program, released a Notice of Proposed Rulemaking (NPRM) addressing 1899 of the SSA and soliciting comments. The NPRM contains specific, proposed eligibility criteria (including patient and program safeguards) that entities would have to meet to qualify as ACOs under the MSSP, and describes proposed quality measures, reporting requirements, and monitoring by CMS. Consistent with the eligibility requirements under 1899(b), the NPRM proposes requiring an ACO to be an organization that is recognized under applicable State law and that has a governing body with adequate authority to execute the statutory functions of an ACO. The NPRM also proposes requiring an ACO s governing body to include ACO participants (or their designated representatives) and to include Medicare patients who are served by the ACO and do not have a financial connection to the ACO. In the NPRM, CMS proposes to require potential ACOs seeking to participate in the MSSP to submit written applications to CMS and to describe in their applications how they plan to use and distribute any MSSP payments, and how that plan would contribute to achieving the specific goals of the MSSP and the general aims of better care for individuals, better health for populations, and lower growth in expenditures. The NPRM proposes that CMS would evaluate the ACO s proposal in determining its eligibility to participate in the program. The NPRM further proposes that CMS will monitor and assess the performance of ACOs and their participants by making site visits, analyzing beneficiary and provider complaints, conducting audits, and analyzing specific financial and quality measurement data reported by the ACO, as well as aggregated annual and quarterly reports. CMS will use these methods to monitor such matters as the ACOs avoidance of at-risk beneficiaries and its compliance with quality performance standards and eligibility requirements. In addition, the NPRM proposes to require participating ACOs to comply with public reporting and transparency requirements. For example, each participating ACO would be required to publicly report information about its participating providers of services and suppliers, leadership, quality performance, and shared savings, including MSSP payments (if any) received by the ACO and the total proportion of shared savings distributed among ACO participants and the total proportion used to support quality performance and program goals. Finally, consistent with the language in 1899(i) of the SSA that authorizes the use of alternative payment models, the NPRM proposes a two-sided model, 3 Population Health Management/ACOs - 20

21 under which participating ACOs would not only be eligible to share in cost savings at higher rates but would also have to repay losses resulting from spending that exceeds a benchmark of expected average per capita Medicare fee-for-service expenditures (MSSP losses). ACOs will be able to elect to participate in the two-sided model during the first two years of their initial MSSP agreement period, with all ACOs operating under the two-sided model by the third year of their initial MSSP agreement period, and during any subsequent MSSP agreement period. LAW Exemption under 501(c)(3) of the Code Section 501(c)(3) of the Code provides, in part, for the exemption from federal income tax of corporations organized and operated exclusively for charitable, scientific, or educational purposes, provided no part of the organization's net earnings inures to the benefit of any private shareholder or individual. Treas. Reg (c)(3)-1(c)(1) states that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Treas. Reg (c)(3)-1(c)(2) states that an organization is not operated exclusively for charitable purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Courts have interpreted the term net earnings as referring to an advantage, profit, fruit, privilege, gain [or] interest derived from the organization. Harding Hospital v. United States, 505 F.2d 1068, 1072 (6th Cir. 1964); Retired Teachers Legal Defense Fund v. Commissioner, 78 T.C. 280, 286 (1982). Treas. Reg (a)-1(c) defines private shareholder or individual as referring to persons having a personal and private interest in the activities of the organization. Such persons are commonly referred to as insiders. Treas. Reg (c)(3)-1(d)(1)(ii) states that an organization is not organized exclusively for any of the purposes specified in 501(c)(3) unless it serves public, rather than private interests. Thus, an organization applying for tax exemption under 501(c)(3) must establish that it is not organized or operated for the benefit of private interests. Treas. Reg (c)(3)-1(d)(2) provides that the term charitable is used in 501(c)(3) in its generally accepted legal sense and includes such purposes as relief of the poor and distressed or of the underprivileged; advancement of 4 Population Health Management/ACOs - 21

22 religion; advancement of education or science; and lessening of the burdens of Government. A determination of whether an organization is lessening the burdens of government requires consideration of whether the organization s activities are ones that a government unit considers to be its burden, and whether such activities actually lessen that burden, based on all the facts and circumstances. See Rev. Rul (organization that assists a county s law enforcement agencies in policing illegal narcotics traffic lessens burdens of government); Rev. Rul (organization that provides legal counsel and training to volunteers who serve as guardians ad litum in a juvenile court dependency program lessens the burdens of government). Rev. Rul , C.B. 128, describes a professional standards review organization established pursuant to a federal statute to review health care practitioners' and institutions' provision of health care services and items for which payment is made under Medicare and Medicaid, and determine whether the quality of services met professionally recognized standards of care. The IRS ruled that by taking on the government's burden of reviewing the quality of services provided under Medicare and Medicaid, the organization lessened the burdens of government within the meaning of Treas. Reg (c)(3)-1(d)(2). Any benefit to members of the medical profession from such activities was incidental to the benefit the organization provided in lessening the burdens of government. Therefore, the organization qualified for exemption under 501(c)(3) of the Code. The promotion of health has long been recognized as a charitable purpose. Rev. Rul , C.B. 718; see also Rev. Rul , C.B. 117 (noting that [i]n the general law of charity, the promotion of health is considered to be a charitable purpose ). However, not every activity that promotes health supports tax exemption under 501(c)(3). For example, selling prescription pharmaceuticals promotes health, but pharmacies cannot qualify for recognition of exemption under 501(c)(3) on that basis alone. Federation Pharmacy Services, Inc. v. Commissioner, 72 T.C. 687 (1979), aff'd, 625 F.2d 804 (8th Cir.1980); see also IHC Health Plans Inc. v. Commissioner, 325 F.3d 1188, 1197 (10th Cir. 2003) (noting that engaging in an activity that promotes health, standing alone, offers an insufficient indicium of an organization's purpose, as [n]umerous for-profit enterprises offer products or services that promote health ). Furthermore, an institution for the promotion of health is not a charitable institution if it is privately owned and is run for the profit of the owners. Rev. Rul In Rev. Rul , the IRS recognized that the activities of a limited liability company (LLC) treated as a partnership for federal income tax purposes are considered to be the activities of a nonprofit organization that is an owner of the LLC when evaluating whether the nonprofit organization is operated exclusively for exempt purposes within the meaning of 501(c)(3). See also Rev. Rul , C.B. 974 (noting that the activities of an LLC treated as a 5 Population Health Management/ACOs - 22

23 partnership for tax purposes are attributed to a university that owns 50 percent of the LLC for purposes of determining whether the university operates exclusively for educational purposes and therefore continues to qualify for exemption under 501(c)(3) ). Tax on Unrelated Business Income Section 511(a) of the Code, in part, provides for the imposition of tax on the unrelated business taxable income (as defined in 512) of organizations described in 501(c)(3). Section 512(a)(1) of the Code defines unrelated business taxable income as the gross income derived by any organization from any unrelated trade or business (as defined in 513) regularly carried on by it less the deductions allowed, both computed with the modifications provided in 512(b). Section 512(c) of the Code provides that, if a trade or business regularly carried on by a partnership of which an organization is a member is an unrelated trade or business with respect to the organization, in computing its unrelated business taxable income, the organization shall, subject to the exceptions, additions, and limitations contained in 512(b), include its share (whether or not distributed) of the gross income of the partnership from the unrelated trade or business and its share of the partnership deductions directly connected with the gross income. Section 513(a) of the Code defines the term unrelated trade or business as any trade or business the conduct of which is not substantially related (aside from the need of the organization for income or funds or the use it makes of the profits derived) to the exercise or performance by the organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under 501. Treas. Reg (d)(2) provides that a trade or business is related to an organization's exempt purposes only if the conduct of the business activities has a causal relationship to the achievement of exempt purposes (other than through the production of income). A trade or business is substantially related for purposes of 513, only if the causal relationship is a substantial one. Thus, to be substantially related, the activity must contribute importantly to the accomplishment of [exempt] purposes. Treas. Reg (d)(2). Rev. Rul describes a 501(c)(3) university that, together with a video technology company, formed an LLC with the sole purpose of offering teacher training seminars at off-campus locations using interactive video technology. The university and the company each held a 50 percent ownership interest in the LLC, which was proportionate to the value of their respective capital contributions to the LLC. In addition, the governing documents of the LLC provided that (1) all returns of capital, allocations and distributions were to be made in proportion to 6 Population Health Management/ACOs - 23

24 the members' respective ownership interests; (2) the LLC would be managed by a governing board comprised of three directors chosen by the university and three directors chosen by the company; (3) the university had the exclusive right to approve the curriculum, training materials, and instructors, and to determine the standards for successful completion of the seminars; and (4) the terms of all contracts and transactions entered into by the LLC with the university and the company and any other parties had to be at arm's length and all contract and transaction prices had to be at fair market value. The IRS noted that because the LLC was treated as a partnership for federal tax purposes, its activities were attributed to the university for purposes of determining whether the university was engaged in an unrelated trade or business. Under these facts and circumstances, the IRS ruled that the university's activities conducted through the LLC constituted a trade or business that was substantially related to the exercise and performance of the university's exempt purposes. DISCUSSION Participation in the MSSP Through ACOs by Tax-Exempt Organizations The IRS anticipates that tax-exempt organizations typically will be participating in the MSSP through an ACO along with private parties, including some that might be considered insiders with respect to the tax-exempt organization. The IRS further anticipates that a tax-exempt organization s participation may take a variety of forms, including membership in a nonprofit membership corporation, ownership of shares in a corporation, ownership of a partnership interest in a partnership (or a membership interest in an LLC), and contractual arrangements with the ACO and/or its other participants. 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. 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. Because of CMS regulation and oversight of the MSSP, as a general matter, the IRS expects that it will not consider a tax-exempt organization s participation in the MSSP through an ACO to result in inurement or impermissible private benefit to the private party ACO participants where: The terms of the tax-exempt organization s participation in the MSSP through the ACO (including its share of MSSP payments or losses and expenses) 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. 7 Population Health Management/ACOs - 24

25 The tax-exempt organization's share of economic benefits derived from the ACO (including its share of MSSP payments) 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 (including its share of MSSP 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. An additional issue raised by the participation of tax exempt organizations in ACOs is whether the share of the MSSP payments received by a tax-exempt organization will be subject to unrelated business income tax (UBIT) under 511. Whether the MSSP payments will be subject to UBIT depends on whether the activities generating the MSSP payments are substantially related to the exercise or performance of the tax-exempt organization s charitable purposes constituting the basis for its exemption under 501. The IRS expects that, absent inurement or impermissible private benefit, any MSSP payments received by a tax-exempt organization from an ACO would derive from activities that are substantially related to the performance of the charitable purpose of lessening the burdens of government within the meaning of Treas. Reg (c)(3)-1(d)(2), as long as the ACO meets all of the eligibility requirements established by CMS for participation in the MSSP. See, e.g., Rev. Rul (recognizing that the federal government considers the provision of Medicare to be its burden). Congress established the MSSP to be conducted through ACOs in order to promote quality improvements and cost savings, thereby lessening the government s burden associated with providing Medicare benefits. The IRS is soliciting comments regarding what additional guidance, if any, is needed to facilitate participation by tax-exempt organizations in the MSSP through ACOs. If additional guidance is needed, the IRS is soliciting comments regarding what criteria or requirements should be analyzed in determining whether participation by a tax-exempt organization in the MSSP through an ACO is consistent with tax-exempt status under 501(c)(3) and whether the taxexempt organization is receiving unrelated business income. ACO s Conduct of Activities Unrelated to the MSSP The IRS understands that some tax-exempt organizations might participate in ACOs conducting activities unrelated to the MSSP, including entering into and 8 Population Health Management/ACOs - 25

26 operating under shared savings arrangements with other types of health insurance payers (non-mssp activities). The IRS anticipates that, in contrast to activities conducted as part of the MSSP, many non-mssp activities conducted by or through an ACO are unlikely to lessen the burdens of government within the meaning of Treas. Reg (c)(3)-1(d)(2). For example, negotiating with private health insurers on behalf of unrelated parties generally is not a charitable activity, regardless of whether the agreement negotiated involves a program aimed at achieving cost savings in health care delivery. However, the IRS recognizes that certain non-mssp activities may further or be substantially related to an exempt purpose. For example, the NPRM released by CMS anticipates that ACOs may also participate in shared savings arrangements with Medicaid, which may further the charitable purpose of relieving the poor and distressed or the underprivileged. See Treas. Reg (c)(3)-1(d)(2). This notice does not address whether and under what circumstances a tax-exempt organization s participation in non-mssp activities through an ACO will be consistent with an organization s tax-exemption under 501(c)(3) or not result in UBIT. However, the IRS requests comments regarding what guidance, if any, is necessary or appropriate regarding a tax-exempt organization s participation in non-mssp activities through an ACO. Specifically, the IRS requests comments regarding how a tax-exempt organization s participation in particular non-mssp activities through an ACO further or are substantially related to an exempt purpose. Comments should describe the activities a tax-exempt organization might expect to participate in through an ACO and address under what rationale participation in such non- MSSP activities might further exempt purposes and also what criteria, requirements, and safeguards would ensure the furtherance of these exempt purposes. In particular, comments should address how a participating taxexempt organization will ensure that non-mssp activities further exempt purposes in the absence of safeguards similar to those present in the MSSP, such as (1) any regulatory requirements imposing quality performance and other standards on the non-mssp activities and (2) any oversight and monitoring of the non-mssp activities by a government agency such as CMS. Comments should also take into account two principles under existing law. First, although the promotion of health has been recognized as a charitable purpose, not every activity that promotes health supports tax exemption under 501(c)(3). See IHC Health Plans, 325 F.3d at 1197; Fed n Pharmacy Serv., 72 T.C. at ; Rev. Rul Second, if a tax-exempt organization is a partner (or member, in the case of an LLC) of an ACO treated as a partnership for federal tax purposes, the ACO s activities will be attributed to the tax-exempt organization for purposes of determining both whether the organization operates exclusively for exempt purposes and whether it is engaged in an unrelated trade or business. See, e.g., Rev. Rul ; Rev. Rul Population Health Management/ACOs - 26

27 REQUEST FOR PUBLIC COMMENT Public comments should be submitted in writing on or before May 31, Comments should be sent to the following address: Internal Revenue Service SE:T:EO:RA:G (Notice ) P.O. Box 7604 Ben Franklin Station Washington, DC Comments may be hand delivered to: SE:T:EO:RA:G (Notice ) Courier s Desk Internal Revenue Service 1111 Constitution Avenue, NW Washington, DC Comments may also be sent electronically to notice.comments@irscounsel.treas.gov. Please include Notice in the subject line. All comments will be available for public inspection. DRAFTING INFORMATION The principal author of this notice is Mackenzie McNaughton of Exempt Organizations, Tax Exempt and Government Entities Division. For further information regarding this notice contact Mackenzie McNaughton at (202) (not a toll-free call). 10 Population Health Management/ACOs - 27

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