A ruling by the Internal Revenue Service (IRS) creates a significant obstacle to a new type of health care network that the Obama administration has promoted as a way to provide better care at lower cost, at least according industry lawyers and providers. Health care markets are rapidly changing as independent doctors and hospitals race to form networks, otherwise known as accountable care organizations, in which they coordinate care for patients. The doctors and hospitals have financial incentives to keep patients healthy and to control costs, and they can share in the savings if they meet performance goals. The new entities, which now cover more than 28 million people, according to Leavitt Partners, help manage care for Medicare beneficiaries, people with employer-sponsored insurance, and consumers who buy coverage through online marketplaces under the Affordable Care Act.
In its recent ruling, the IRS denied a tax exemption sought by an accountable care organization that coordinates care for people with commercial insurance. The tax agency said the organization did not meet the test for tax-exempt status because it was not operated exclusively for charitable purposes, and it provided private benefits to some doctors in its network. The name and location of the organization, formed by a nonprofit health care system, were not disclosed. The ruling does not affect accountable care organizations formed solely to participate in Medicare, but it could affect similar entities serving privately insured patients. Many accountable care organizations coordinate care for both Medicare beneficiaries and privately insured patients.
The I.R.S. ruling is in conflict with the direction that the Department of Health and Human Services has given to the hospital field. […] It is imperative for the government to make clear that hospitals can participate in accountable care organizations without incurring the catastrophic loss of their tax-exempt status.
Melinda R. Hatton, senior vice president and general counsel of the American Hospital Association, said the IRS. ruling “appears to be a serious obstacle for nonprofit hospitals striving to coordinate care for their communities.” In a letter asking the tax agency to reconsider its position, Ms. Hatton stated that “the I.R.S. ruling is in conflict with the direction that the Department of Health and Human Services has given to the hospital field. […] It is imperative for the government to make clear that hospitals can participate in accountable care organizations without incurring the catastrophic loss of their tax-exempt status.”
T. J. Sullivan, an expert on the tax treatment of health care providers, said the IRS ruling meant that accountable care organizations will face an uphill battle in trying to qualify for federal income tax exemptions if they do not participate in Medicare.
The presence of a single substantial nonexempt purpose destroys the exemption, regardless of the number or importance of the exempt purposes.
The IRS acknowledged that the organization in question was trying to increase quality of care, lower costs, and improve the health of the community—the “triple aim” championed by President Barack Obama. But, the IRS also pointed out that the organization has also negotiated agreements with insurers on behalf of doctors and that is not a charitable activity, or one that directly benefits the community as a whole. Said the IRS, “the presence of a single substantial nonexempt purpose destroys the exemption, regardless of the number or importance of the exempt purposes.”
Catherine E. Livingston, a tax lawyer at Jones Day who was the health care counsel at the IRS. from 2010 to 2013, said the ruling was out of step with trends sweeping the health care industry. According to Livingston, “in the past, insurers paid for every service and procedure one patient at a time. But now the fundamental thrust of all American health policy, led by the Department of Health and Human Services, is to think about health care on a populationwide, community-wide basis. The IRS has not yet accepted this new paradigm.”
In the past, insurers paid for every service and procedure one patient at a time. But now the fundamental thrust of all American health policy, led by the Department of Health and Human Services, is to think about health care on a population-wide, community-wide basis. The IRS has not yet accepted this new paradigm.
The tax agency said that an accountable care organization participating in Medicare could be tax-exempt because it advances “the charitable purpose of lessening the burdens of government.” By contrast, the IRS told the group seeking tax-exempt status, “uou are not established pursuant to a statute, managed by government officials or funded by government grants, and there is no government oversight of your activities similar to that of an A.C.O.” in Medicare.
Under the 2010 health care law, the government has recognized more than 400 accountable care organizations for Medicare beneficiaries. The accountable care organization is a relatively new way of managing and financing health care, based on the premise that insurers should not just pay for more and more services provided to people who are sick or injured. “Many health plans see accountable care models as the wave of the future,” said Clare Krusing, a spokeswoman for America’s Health Insurance Plans. But Krusing pointed out that insurers also see a risk that doctors and hospitals, working together in an accountable care organization, will “operate as a provider monopoly and charge far higher rates” than they could if they were doing business independently.
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