Additional Requests for Guidance from IRS on Accountable Care Organizations

June 15, 2011

More hospital systems are requesting additional guidance from the IRS on the creation of Accountable Care Organizations (ACOs) and qualification for tax exemption under 501(c)(3) for participation in the Medicare Shared Savings Program (MSSP). In addition to the letter from the American Hospital Association (AHA) requesting further guidance, see McGuireWoods News Alert, “More Guidance on Accountable Care Organization Needed from IRS,” more comments on Notice 2011-20 concerning IRS requirements for tax exemption of ACOs have been released by the IRS from VHA Inc., UPMC Health Plan, Texas Medical Association, Premier, Hospital Sisters Health System, Hospital & Healthsystem Association of Pennsylvania, Allina Hospitals Clinics and the University of California at Berkeley School of Law.


Generally, the recently released letters from these major hospital associations focus on whether the IRS requirement on proportionality will be a big disincentive for doctors and other service providers to be involved in a joint venture ACO. The comments specifically question the IRS requirement regarding proportionality of gains and losses based on ownership interests and capital contributions rather than applying the Centers for Medicare & Medicaid Services’ (CMS) approach which appears to contemplate the distributions of significant portions of the shared savings based on the medical care provider’s contributions towards quality performance and attainment of savings goals – irrespective of ownership interests.


The comments also noted that there are disincentives for entering into an ACO because of the sizeable startup costs for hospitals and doctors who are concerned about being adequately rewarded for their efforts. CMS has estimated that startup costs for the first year of an ACO’s existence will be in the range of $131-$263 million. More guidance is also needed on the issues of impermissible private benefit. This issue was also raised in the AHA’s comment on May 31, for guidance from the IRS that financial incentives to staff physicians would not be treated as impermissible private benefit and clarification on what factors would trigger a review of an arms length transaction.

Specific Guidance Requested

  • Clarification that a tax-exempt entity’s participation in the ACO is satisfied if the methodology for allocation of payments, losses and expenses are spelled out in the MSSP written agreement.
  • Clarification that termination of an ACO from the MSSP will not jeopardize the participant’s tax-exempt status or result in the imposition of intermediate sanctions absent evidence of inurement or private benefit.
  • Clarification that the requirement for proportional allocations and distributions does not refer to the distribution of the MSSP payments from pools under contractual arrangements between the ACO and its providers, but rather to the allocations of the ACO’s net income and payment of such losses.
  • Flexibility for ACOs and their participating providers to allocate MSSP payments and losses in a manner that aligns incentives to achieve program goals.
  • Consideration that an ACO’s activities unrelated to its ACO mission could still satisfy a charitable purpose under section 501(c)(3) through the relief of a governmental burden.

The IRS is Listening

The IRS has provided some relief to certain hospital systems by making a portion of Schedule H of the 2010 Form 990 optional for tax-exempt hospitals operating one or more hospital facilities for the 2010 tax year. See IRS announcement 2011-37 dated July 5, 2011.

The IRS, following a scathing letter from the AHA dated April 20,2010, has decided to make Part V.B optional for the 2010 tax year for these hospital systems. The AHA said that the new reporting requirements in Schedule H were onerous and redundant. The IRS said while the filing of Part V.B is optional, hospital organizations required to file Form 990 for 2010 are still required to file the remaining portions of Schedule H including sections A and C of Part V. For a further discussion of the AHA comments, see McGuireWoods News Alert, “Hospital Associations Request Withdraw of Schedule H.”

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