26th Annual Health Sciences Tax Conference

Transcription

1 26th Annual Health Sciences Tax Conference December 5, 2016

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2016 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed 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. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Presenters Tadd Ingles Ernst & Young LLP Chicago, Illinois Michael Vecchioni Ernst & Young LLP Cincinnati, Ohio Tricia M. Johnson Ernst & Young LLP Cincinnati, Ohio Page 3

4 Agenda Overview and learning objective A transforming health care system Relevant unrelated business income (UBI) considerations, in general Tax considerations for risk-based payment models Reviewing your situation Ways to seek Internal Revenue Service guidance Questions? Page 4

5 Overview and learning objective This session will provide an in-depth understanding of the recent trends in various risk arrangements and the tax implications that these arrangements could drive. In recent years, we have seen the revenue streams move away from fee for service into various forms of capitation, including bundled payments, direct contracting with employers, accountable care organizations and physician hospital organizations. Page 5

6 A transforming health care system Page 6

7 A transforming health care system The health care industry is evolving, prompted in part by changes mandated by the Affordable Care Act (ACA), but also by patient demands and self-initiated industry strategies and vision this is driving a push toward value of care as opposed to volume of services. The industry is transforming from an acute care focus to one that considers the continuum of care and population health management. The industry is changing to a system where providers, payors, purchasers and patients can make more informed choices. Value-based payments are a consequence of increased focus on population health management and the public s desire to slow or reverse rising health care costs. Page 7

8 A transforming health care system As consumers face increasing financial burdens for health, they are becoming more savvy at managing their health care. Patients are making more informed decisions and taking more ownership of how their health care dollars are spent. Patients are making more demands for high-quality service. They are becoming more knowledgeable about how the industry works, from insurance premiums, deductibles and co-pays to outcomes and safety ratings. As a result, health care is becoming a consumer-driven industry, propelling behavioral change by all of its participants. Page 8

9 A transforming health care system Hospitals costs are generally rising faster than revenues, even with an improved payment stream attributed to a traditionally uninsured patient population. This has put a chronic strain on hospitals operating margins. The result is a growing pressure to cut expenses. Health care organizations are using a variety of methods to cut costs, including educating physicians and other providers about costs and what they can do to help reduce those costs. Also, health care organizations are creating shared cost-savings programs with other providers. Page 9

10 A transforming health care system Health care organizations revenue from payors is becoming increasingly risk based and dependent on factors such as quality scores and documentable individual member health status. These types of payments, combined with patient demands for more price transparency, are causing hospitals to renew their focus on clinical and operational quality. Value and risk-based reimbursement models are becoming common. Providers are accepting more risk through a variety of arrangements, from shared reward systems to contingent reimbursement programs such as meaningful use. Page 10

11 A transforming health care system Cost, quality, access and care coordination pressures have caused health care organizations to rethink their structure, consolidate or form new business arrangements. Outcomes-based payments are causing health care systems to take action to become vertically integrated in order to control the entire cycle of care. Incentives built into financial payment models and care coordination have accelerated the health care industry s use of electronic health records (EHRs). Many hospitals are also forming their own health plans to counter the possibility of being excluded from networks and to protect access to their patient population. Page 11

12 A transforming health care system Payors are facing added burdens as well. As a result of government and public pressure, they are being forced to come up with better ways to manage medical expenses, deal with serving a growing individual market and survive in a world of complex regulations. Consequently, in many respects, payor and provider incentives are becoming more closely aligned. Payors are partnering with providers to implement new payment methods that reward quality and care coordination while shifting more financial risk to providers. Page 12

13 A transforming health care system For physicians, health system employment has become an attractive option due to several factors, including the health system being able to provide needed investments to comply with EHR requirements, fund the cost of expensive malpractice insurance and furnish the administrative parts of running a private practice. Physicians are finding that alignment with a hospital can allow them to be better positioned to effectively coordinate patient care. This also lines up with with health care systems growing interest in controlling the full cycle of care. Page 13

14 A transforming health care system These dynamics have led to a growing emphasis on aligned payment strategies. Payment is tied to value and patient outcomes. Incentives are being created through compensation models to enhance access, improve quality of care and achieve desired outcomes, including preventing diseases and appropriately using fewer and less intensive services. More collaborative structures are forming. Models such as accountable care organizations (ACOs), physician-hospital organizations (PHOs) and clinically integrated networks (CINs) offer a means for payors to bring providers the administrative, technical and clinical support they need to fully realize the potential of payment models. Page 14

15 A transforming health care system Government programs Federal and state governments have been launching various programs to encourage this change in the industry and harmonize financial incentives. For example, in the five years since passage of the ACA, the Centers for Medicare & Medicaid Services (CMS) has launched numerous programs and payment models to compel health care providers to achieve large-scale transformation. By 2018, Medicare alone will have shifted over 50% of its provider payments into alternative payment arrangements such as ACOs or bundled payments. Page 15

16 A transforming health care system ACOs ACOs continue to be a leading model for aligning financial incentives. CMS has utilized ACOs with its Medicare Shared Savings Program (MSSP), Pioneer and Next Generation ACO Model. Many states have been using ACOs for their Medicaid programs and more are implementing or considering them. In many markets, commercial payors have established accountable care programs similar to the CMS ACO initiatives. Many of these are structured identically to an MSSP ACO where the savings from efficiencies and/or reduced health care expenses are shared with the health care providers who participate in the arrangement provided that goals related to the improvement of patients health care outcomes are achieved. Page 16

17 A transforming health care system ACOs An ACO is a local health care organization and a related set of providers (at a minimum, primary care physicians, specialists and hospitals) serving a defined population. An ACO is expected to deliver coordinated and efficient care. ACOs that achieve quality and cost targets will receive some sort of financial bonus, and under some approaches, those that fail will be subject to a financial penalty. In order to meet the requirements of this type of incentive system, an ACO needs to be able to: Care for patients across the continuum of care in different institutional settings Plan prospectively for its budgets and resource needs Support comprehensive, valid and reliable measurement of its performance since payments are based on reaching certain cost and quality benchmarks with the incentive to maximize patient health rather than increase the volume of services delivered Page 17

18 A transforming health care system Bundled payment programs Bundled payment strategies are being utilized more frequently to foster value-based health care. To further this goal, CMS launched a series of pilot programs tying provider payments closely to quality and outcome, while also reducing Medicare spending. Until recently, these were voluntary programs. From a Medicare perspective for example, two recent programs incorporate bundled payments. These are the Comprehensive Care for Joint Replacement Program (CJR) and Medicare Access and CHIP Reauthorization Act (MACRA). Page 18

19 A transforming health care system Bundled payment programs CMS introduced the mandatory CJR bundled payment program on April 1, Under the five-year CJR program, 794 hospitals in 67 markets must use a bundled payment model for total hip and knee joint replacement surgery for their Medicare fee-for-service patients. Under the CJR, the hospital assumes full risk for cost and quality of services provided for not only the inpatient hospital stay but also postacute providers (e.g., home health agencies, nursing homes and physical therapists). Hospitals that exceed the target price set by CMS must pay back the difference at the end of the performance year, while those that realize cost savings will receive additional payments. Hospitals bear the full risk of costs and are accountable for keeping overall costs below CMS s target episode rate in order to benefit from reconciliation payments and avoid repayments. Page 19

20 A transforming health care system Bundled payment programs CMS is providing hospitals with data needed to see spending for the entire care event of joint replacement. Previously, the hospital s information was limited to its own services rendered in the hospital and any of its owned post-acute care facilities. In the first year, hospitals will receive three years of Medicare claims data detailing claims for hospital inpatient and outpatient services plus any payments made to surgeons, anesthesiologists and post-acute providers for readmissions during a 90-day post-discharge period. Afterward, hospitals will receive updated claims information each quarter. CMS will determine the hospital s target episode rate, moving from a blend of the hospital and regional average episode spend in year one to a 100% regional rate by year four. Page 20

21 A transforming health care system Bundled payment programs private sector Some health care providers are negotiating similar bundled arrangements with payors (e.g., Health Maintenance Organizations (HMOs), insurance companies) for the full continuum of care provided to their patients. Similarly, some national employers have initiated bundled payment arrangements with hospitals for certain specific health services, such as cardiac surgeries and spinal surgeries. Page 21

22 A transforming health care system CINs A CIN is typically a hospital-sponsored network of independent physicians who have grouped together with a commitment to improve quality and cost for defined patient populations. Physicians normally comprise the majority of the governing body. Physicians can remain independent (i.e., not hospital employed). Hospitals offer capital, technology and administrative support; in exchange, they expect certain reserved powers (especially if tax exempt). Independent physicians who are not economically integrated may not engage in single signature third-party contracting unless they become clinically integrated. Physicians in the CIN can qualify for a safe harbor from antitrust laws and negotiate collectively for enhancements to commercial payor contracts. Page 22

23 A transforming health care system CINs The CIN is often a foundation for the formation of an ACO. Similar to that of an ACO, which generally covers the full breadth of providers, the goal of a CIN is to improve health care for physician practices across specialty types and to allow those providers to engage in joint contracting, usually for the purpose of receiving performance-based compensation. CINs are usually separate legal entities. Created as membership organizations in the form of a nonprofit corporation, partnership or LLC There can be multiple classes of membership Commonly desire flow-through treatment for tax purposes Page 23

24 A transforming health care system PHOs PHOs are organizations formed to further bond hospitals and their medical staff. PHOs are frequently developed for the purpose of contracting with managed care plans. A PHO may be open to any member of the medical staff who applies, or it may be closed to staff members who don t qualify or whose specialty is otherwise well represented. PHOs were first created in the early 1990s by hospitals that were interested in linking with physicians in order to offer a full-service provider product to managed care payors and employers. Page 24

25 A transforming health care system PHOs A PHO is a structure that is jointly owned by physicians and a hospital. It can be a for-profit corporation, a partnership or a limited liability company. Specialists (e.g., cardiologists, surgeons) usually do not have ownership in the PHO since they do not function in a gatekeeper fashion as do primary care physicians. The PHO contracts with specialists to provide specialized medical services to patients. The PHO negotiates with managed care plans on behalf of the health care providers for hospital, primary care and specialty physician services provided to the plans members. Page 25

26 A transforming health care system PHOs The forerunner PHOs have either evolved into ACOs or CINs, retained their original form with some changes to operations or have dissolved out of existence. Many early PHOs were not successful at forming the necessary infrastructures to manage utilization cost effectively. Consequently, they were not able to enter into enough contracts with health plans to be sustainable. PHOs also needed to evolve as a result of the Federal Trade Commission s (FTC) charges in 1996 that PHO negotiation of fees for physicians was price-fixing and in violation of antitrust laws. In a 2006 advisory opinion, the FTC provided that it would not pursue antitrust charges against a PHO that was truly clinically integrated. This opened the door for CINs. Page 26

27 Relevant UBI considerations, in general Page 27

28 Relevant UBI considerations, in general In general, the Internal Revenue Service (IRS) has considered the following areas to generate UBI for a health system tax-exempt entity. Services to unrelated third parties, whether taxable or tax-exempt, unless also further to a charitable purpose of the service-providing organization Services that are not for a patient, such as lab testing on a specimen that was taken in a private physician s office Tax guidance has not kept pace with how health care delivery and payment models work today. Consider the following: Patients are changing with the provision of virtual care. The ACA has promoted and sometimes required partnering between organizations to provide quality care for lower costs. Payment for such services is changing, including payments by commercial payors, Medicare and Medicaid. Page 28

29 Tax considerations for risk-based payment models Page 29

30 Tax considerations for risk-based payment models The difficulty brought about by these new organizational and payment structures lies with how the IRS would perceive them. The IRS has been slow to refine the tax treatment of HMOs, which has been the long-term model in place. Much uncertainty remains on whether the IRS truly believes that HMOs ought to be tax-exempt, and if so, under what particular circumstances and fact patterns. A mix of tax law principles tends to add to the confusion, such as determining whether an HMO is engaged in the business of providing insurance and, if so, understanding the related consequences. Note that the IRS has generally treated PHOs as taxable and has allowed tax exemption only for certain ACOs (those in the MSSP). Page 30

31 Commercial-type insurance income under Internal Revenue Code (IRC) Section 501(m)(2) Organizations are denied tax exemption when providing commercial-type insurance is a substantial part of the organization s activities. The activity of providing commercial-type insurance is treated as an unrelated trade or business. In lieu of the tax imposed by IRC Section 511 with respect to such activity, such organization is treated as an insurance company. Commercial-type insurance does not include: Insurance provided substantially below cost to a class of charitable recipients Incidental health insurance provided by a health maintenance organization of a kind customarily provided by such organizations Property or casualty insurance provided by a church or convention or association of churches Provision of retirement or welfare benefits (or both) by a church or convention or association of churches Charitable gift annuities Page 31

32 Commercial-type insurance income under IRC Section 501(m)(2) A Section 501(m) analysis: Is the risk assumed an insurance risk? Is this risk of a commercial type? Does an exception under IRC Section 501(m) apply? What is an insurance risk? No statutory/regulatory definition; evolved from case law The courts typically apply four principles that offer a framework for addressing whether an insurance risk is present: There must be an insurance risk rather than a service or investment risk. There must be risk shifting and risk distribution involved in the arrangement. Commonly accepted notions of insurance should be considered. General principles of federal income taxation should apply. Page 32

33 Commercial-type insurance income under IRC Section 501(m)(2) Risk shifting occurs if a person facing the possibility of an economic loss transfers some or all of the risk of loss to the insurer such that a loss by the insured does not affect the insured because the loss is offset by the insurer. Risk distribution emphasizes the pooling aspect of insurance: that it is the nature of an insurance contract to be part of a larger collection of coverages, combined to distribute risks between insureds. Clougherty Packing Co. v. Commissioner, 811 F.2d 1297, 1300 (9th Cir. 1987). Page 33

34 Commercial-type insurance income under IRC Section 501(m)(2) Before IRC Section 501(m) can apply, the insurance risk must be of a commercial type. The 1986 House Report discussing IRC Section 501(m) states that the provision of insurance to the general public at a price sufficient to cover the costs of insurance generally constitutes an activity that is commercial. The General Explanation of the Tax Reform Act of 1986 adopted an apparently broader definition of commercialtype insurance when it stated that commercial-type insurance is any insurance of a type provided by commercial insurance companies. Page 34

35 Commercial-type insurance income under IRC Section 501(m)(2) Notice announced the IRS s intention to propose regulations defining the term commercial-type insurance and addressing how Section 501(m) applies to Sections 501(c)(3) and 501(c)(4) organizations, including HMOs. The IRS also issued directives to provide for the handling of examinations and exemption applications for HMOs. In light of the regulations project, the IRS withdrew its Examination Guidelines for HMOs from the Internal Revenue Manual (IRM). The term commercial-type insurance is not defined in the IRC and no regulations or published guidance have yet been issued under Section 501(m). Since the time Section 501(m) was enacted, there have been significant developments in the operations and payment models in health insurance and the provision of health care. Page 35

36 Commercial-type insurance income and IRC Section 501(m)(2) IRS position on insurance : Congress never defined what commercial insurance is, other than in the context of what it is not. An activity can be insurance but not commercially available, and that activity can still be UBI. The insurance activity would be taxed under the general UBI rules and not under Section 501(m). Health insurance of a kind traditionally provided by an HMO is not considered commercial insurance and is not taxable under Section 501(m). But, under the above view, if the activity is insurance, the IRS considers it to be UBI and taxed outside of Section 501(m). Does Section 501(m) trump the overall insurance question? If non-commercial insurance is UBI, how is taxable income calculated? Page 36

37 Commercial-type insurance income and IRC Section 501(m)(2) The legislative history to Section 501(m) provides that it was not intended to alter the tax-exempt status of an ordinary HMO that provides health care to its members at its own facility (i.e., a freestanding, staff model HMO that employs its own health care professionals). In this regard, the IRS has also taken the position that an HMO is not engaged in an insurance activity when it transfers substantially all risk to the providers or otherwise fixes its costs for providing care to its members. This position favors staff model HMOs (physicians paid on a salaried basis) and those which compensate providers through capitation or other fixed fees. In so doing, the HMO has shifted its risk to the providers. Note: Technical Advice Memorandum (TAM) states that an HMO was still an insurance company even though it paid providers on a capitated basis. Page 37

38 HMOs Tax status considerations Section 501(c)(3) is usually allowed for: Staff model HMO (generally has employed physicians) Medicaid HMO Section 501(c)(4) is an alternative status for organizations unable to qualify under Section 501(c)(3): Not charitable Provider-owned HMOs may qualify as social welfare organizations if they have favorable community benefit-type facts Avoids federal and maybe state income taxation but does not entail certain benefits of Section 501(c)(3) status No receipt of deductible charitable contributions No tax-exempt bond financing Greater congressional and IRS scrutiny regarding political activities Page 38

39 HMOs Tax status considerations Section 501(c)(4) allowed in certain situations: Favorable facts and circumstances, such as promoting social welfare within its community Prior IRM guidance was pulled years ago Community benefit is now commonly reviewed by IRS and primary court cases are: Intermountain Health Care good characteristics Vision Services Plan not-so-good characteristics Most recent guidance from IRS in the form of private letter rulings (issued for denials of tax exemption) and exemption approvals Page 39

40 ACOs Tax considerations ACOs can be structured in a number of legal formats: A freestanding nonprofit entity Can the entity qualify for tax-exempt status? A freestanding for-profit entity The entity will be subject to federal income tax and possibly state and local income and other taxes. A partnership (or LLC treated as a partnership) The income of the partnership flows through to the partners for federal income tax purposes. Its character as UBI or not is determined at the partner level. A single member LLC or other division of a hospital Is the ACO activity UBI and/or does it pose a threat to the tax-exempt status of the hospital due to its size and extent? Page 40

41 ACOs Tax considerations IRS Notice IRS solicited comments on necessary guidance on the participation of exempt organizations (EOs) in the MSSP as well as participation of EOs in activities unrelated to the MSSP (including shared savings arrangements with commercial health insurance payors) through ACOs Provides guidance on impact on the tax-exempt status of EOs participating in ACOs and UBI implications of receiving MSSP payments Page 41

42 ACOs participating in the MSSP Tax considerations Impact on tax-exempt status of organizations participating in the MSSP through an ACO: The IRS notes that EOs may participate in the MSSP through an ACO along with private parties, including some that may be insiders with respect to the EO. The IRS states that the EO must ensure that its participation in the MSSP through an ACO does not result in net earnings inuring to the benefit of insiders and that the ACO is not being operated for the benefit of private parties. The IRS states it must determine whether prohibited inurement or impermissible private benefit has occurred on a case-by-case basis, based on all the facts and circumstances. Page 42

43 ACOs participating in the MSSP Tax considerations However, because of CMS regulation and oversight, the IRS expects it will not consider participation in the MSSP through an ACO to result in inurement or private benefit if: Terms of participation are set forth in advance in a written agreement negotiated at arm s length CMS has accepted the ACO into the MSSP (and no termination) EO s share of economic benefits is proportional to the EO s contributions provided to the ACO (including an ownership interest proportional to capital contributions) EO s share of ACO losses cannot exceed its share of benefits All contracts and transactions among the EO, ACO, ACO s other participants and others are at fair market value Page 43

44 ACOs participating in the MSSP Tax considerations Will the EO s share of MSSP payments be UBI? The IRS expects, absent private benefit or inurement, any MSSP payments to an EO would derive from activities substantially related to the charitable purpose of lessening the burdens of government. As stated by the IRS in Notice , 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. Page 44

45 ACOs operating outside of the MSSP Tax considerations The only public IRS guidance on this was in the form of a recent IRS Private Letter Ruling (PLR). PLR addressed a non-mssp ACO s ability to qualify for tax-exempt status under IRC Section 501(c)(3). The organization discussed in the PLR did not directly provide health care services to the public, but instead dedicated itself to the furtherance of the Triple Aim health care reform goals established by the ACA, which are: Reducing the cost of care for individuals Improving patient access to and quality of care Improving population health and patient experience Page 45

46 ACOs operating outside of the MSSP Tax considerations The ACO was an integrative network of health care providers, including both health system-affiliated and unaffiliated independent providers. The ACO developed performance measures and data infrastructure to assess care delivery of participating providers. It also used incentives to motivate improvements by participating providers in achieving Triple Aim goals. The ACO acted as representative for all participating providers in the negotiation and execution of certain agreements with third-party payors. The agreements linked rewards and penalties for participants to their achievement of performance measures to incentivize changes in participant behavior in furtherance of the Triple Aim goals. Page 46

47 ACOs operating outside of the MSSP Tax considerations The ACO had two primary arguments for tax exemption: First, it was engaged in the charitable activity of lessening the burdens of government through its fostering of the Triple Aim goals of the ACA. The IRS disagreed, saying that 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 found there to be evidence that ACOs created to participate in the MSSP are fulfilling such an objective manifestation and, therefore, lessening the burdens of government. The IRS found no such manifestation present in the ACA that the government considers non-mssp activities to be its burden, regardless of whether such ACOs are pursuing the Triple Aim goals of the ACA. The IRS also said that there is no other government oversight of non-mssp ACOs. Page 47

48 ACOs operating outside of the MSSP Tax considerations The ACO had two primary arguments for tax exemption (cont.): Second, the ACO argued that it was engaged in the charitable activity of promoting health. The IRS countered that not all activities that promote health further charitable purposes under Section 501(c)(3). In addition, while the Triple Aim goals set forth by the ACA and adopted by the ACO generally promote health, the IRS concluded that not all activities advancing those goals are necessarily in furtherance of charitable purposes under Section 501(c)(3). Page 48

49 ACOs operating outside of the MSSP Tax considerations The IRS determined that the ACO s negotiation of payor agreements, including on behalf of participating physicians who were not affiliated with the related health system, is a substantial part of the ACO 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. The IRS concluded that the negotiation of these agreements results in more than an incidental private benefit to non-systemaffiliated providers and is a substantial non-exempt purpose, preventing recognition of exemption under Section 501(c)(3), regardless of any other charitable activities the ACO may conduct. Page 49

50 ACOs operating outside of the MSSP Tax considerations It remains unclear whether and when furthering the Triple Aim goals of the ACA would further tax-exempt charitable purposes. Would an ACO with a dual-use purpose (participating in MSSP as well as negotiating contracts between independent physicians and commercial payors) or a health care system-related ACO that served only providers within the system be able to qualify for exemption under Section 501(c)(3)? Would such an ACO that was structured as a partnership or singlemember LLC cause the tax-exempt health system partner to have UBI from flow-through income? Could it threaten tax-exempt status if it is significant in size? Page 50

51 Bundled payments Government programs tax considerations These at risk situations present their own unique tax considerations. Bundled payment structures, which though not involving a separate entity being formed, may draw out the insurance risk analysis as applied to the health care provider that is responsible for the costs associated with the continuum of care provided to the patient. Can the health care institution rely on the IRS s position dealing with MSSPs carried on by ACOs? For Medicare-sponsored bundled payment structures, it might be argued that mandated programs such as CJR are directly in furtherance of a charitable purpose of lessening the burdens of government. It is less certain with respect to voluntary government programs. Page 51

52 Bundled payments Non-government programs tax considerations Implications of bundled payment arrangements unrelated to a government program: The IRS has ruled in a somewhat dated PLR that capitation payments received by a hospital from an affiliated HMO to provide services through employed and salaried physicians, as well as contracts with primary care physicians on a capitated basis (or on a fee schedule basis in the case of specialists), are not UBI. However, the IRS also suggested in a 1992 PLR that a hospital may be providing commercial-type insurance if risk is shifted to the hospital by other organizations or individuals in the HMO s programs. PLR (July 22, 1992). This rationale puts the hospital on par with an HMO that does the same thing with organizations or individuals in its program. Page 52

53 Bundled payments Non-government programs tax considerations Capitation that a hospital receives for assuming risk for services provided by related providers is arguably not considered insurance or UBI. It is a normal business risk and furthers the tax-exempt mission of providing health care to its patients through arrangements with its related providers. In contrast, if a hospital assumes risk for services to be provided by unrelated providers, it might constitute insurance or even commercialtype insurance as considered in IRC Section 501(m). This might apply regardless of what type of payment arrangement is in place between the hospital and providers. Negotiating with payors on behalf of unrelated parties is generally not a charitable activity, regardless of cost savings. Can the hospital argue that it is doing this as a convenience for its patients or in furtherance of their care? Page 53

54 CINs Tax considerations Since CINs are usually physician-dominated organizations that enjoy financial benefits and support from sponsoring hospitals, care must be exercised to avoid risk to the hospital s tax-exempt status or exposure to UBI. A hospital s support of a CIN could result in prohibited private inurement, private benefit and/or an excess benefit transaction. The hospital should be fairly compensated for any services it provides to the CIN, and it must be sure to deal with the CIN in an arm s-length fashion. If a hospital is a partner in a CIN that generates income, or it receives income from support services that it provides to the CIN, the income might be UBI to the hospital. Page 54

55 PHOs Tax considerations PHOs have been unable to obtain federal tax-exempt status in large part due to furtherance of private interests of the physicians and the lack of a charitable purpose. Therefore, corporate PHOs are taxpaying entities. PHOs that are structured as partnerships could lead to UBI consequences to the hospital partner under the IRS position on joint ventures contained in Revenue Ruling and other tax law authority. If PHOs possess the characteristics of an insurance company by taking on insurance risk, they could be taxed as an insurance company. This could cause a partnership to be considered a corporation and taxed as an insurance company. Page 55

56 Reviewing your situation Page 56

57 Evaluate contracts for Sample contract structures and how you might think through them: Capitated payments and bear risk only on services the health system offers Capitated payments and full risk bearing for an individual, subcontracted from a large commercial insurance company Same as above, though subcontracted from the health system s own health plan, whether taxable or not taxable In each, what are the areas of risk bearing and the possible occurrences for third-party care? Vacations Out of area, example spend 50% of year in north, 50% in Florida or Arizona Services that the health system doesn t offer Page 57

58 Ways to seek IRS guidance Page 58

59 Ways to seek IRS guidance, in general Forms 1023 and 1024 If the activity is in its own new entity, may apply for tax exemption Form 8940 for a redetermination of tax exemption If the entity already exists and the activity is significant in size, may request confirmation of exemption from IRS in Cincinnati Not required to file this form and may choose to only disclose the new activity on Form 990 PLR request Clearest way to assure proper tax treatment on a specific activity is to request a ruling from the IRS National Office Page 59

60 Reorganization of IRS Tax-Exempt and Government Entities (TE/GE) Division Since the 2014 reorganization: TE/GE Chief Counsel Technical law specialists and support staff responsible for published guidance (e.g., revenue rulings, revenue procedures) and certain PLR requests and technical advice were shifted from TE/GE Division headquarters to the IRS Office of Chief Counsel in January 2015 EO Determinations Based in Cincinnati and responsible for determinations, redeterminations, maintenance of the Business Master File EO Examinations Based in Dallas and responsible for choosing entities for review and performing exams Page 60

61 Interaction with the IRS Exemption rulings Obtaining recognition of exemption Exemption application (IRS Forms 1023 or 1024) Cases may be closed via screening or need further case development Assignment of reviewer Where is my exemption application? website Effective date of exemption IRS determination letter Group exemption rulings Redeterminations and Form 8940 Page 61

62 Form 1023 Form 1023 Section 501(c)(3) Program service activities Board member qualifications and community representation Compensation of officers Financial data and projections Copies of contracts and agreements Model conflict of interest policy Schedule C (hospitals and medical research organizations) Page 62

63 Form 1024 Form 1024 Section 501(c)(4) and other 501(c) Form last updated September 1998 Open-ended questions to describe activities Schedule for Section 501(c)(4) is not representative of the information IRS needs to make a determination Community benefit is not specifically addressed or requested Self-declaring considerations Organization that qualifies under 501(c)(4) may either self-declare 501(c)(4) status (file Form 990) or file Form 1024 to request IRS recognition of exemption Generally must file Form 1024 within 27 months of formation for IRS recognition of exemption to be retroactive to date of formation Section 501(c)(4) entities must also consider the new notification requirement (Protecting Americans From Tax Hikes Act filing requirement within 60 days of entity formation) Page 63

64 Questions? Page 64

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