§ 13.3 QUALIFIED NONPROFIT HEALTH INSURANCE ISSUERS

p. 336. Insert following last paragraph of the section:

Subsequently, the IRS issued final regulations regarding applying for recognition as a tax‐exempt qualified nonprofit health insurance issuer (QNHII)^79.1 These regulations became effective on January 29, 2015. The final regulations provide that the Commissioner of the IRS has authority to prescribe application procedures that must be followed by QNHIIs seeking recognition of tax‐exempt status. The regulations underscore the statutory application of notice rules to QNHIIs, requiring them to apply for recognition of exempt status and confirming that this is the only path for treating such organizations as described as tax‐exempt under this section of the Code.^79.2 Accordingly, QNHIIs cannot rely on self‐declaring their exempt status.

The final regulations authorize the Commissioner to recognize QNHIIs as tax‐exempt effective at a date prior to the date of its application if the application is properly and timely submitted and the QNHII's prior purposes and activities are consistent with the requirements for exemption for such organizations. However, if the IRS requires a QNHII to alter its activities or make substantive amendments to its enabling instrument, the IRS will recognize exemption effective only as of the date specified in the determination letter or ruling. In any event, an organization may not be recognized as tax‐exempt as a QNHII before the later of its formation or March 23, 2010.^79.3

A QNHII that has commenced operations and that intends to file an application with the IRS for recognition of exemption should begin filing Form 990 and indicate on its return that it has not yet received a determination letter. In addition to the general information required on Form 990, QNHIIs must report requested information regarding their required reserves.

The IRS published a revenue procedure containing more detailed provisions for requesting recognition of exemption shortly after the final regulations were issued.^79.4 Under this procedure, a QNHII seeking recognition of exemption must submit a letter application, rather than a form, along with the appropriate user fee. Requirements for a substantially completed letter application are set forth in the revenue procedure.

§ 13.5 ACCOUNTABLE CARE ORGANIZATIONS

p. 351. Insert footnote at the end of the final sentence:

1. 113. For a discussion of ACO tax exemption that includes activities outside of the Medicare Shared Savings Program, see Griffith and Livingston, “Bringing Hospital Tax Exemption into the Modern Era: Why ACO Activities Should Be Tax‐Exempt,” 19 AHLA Connections 36 (July 2015).

*p. 351. Insert following existing text:

In 2016, the Internal Revenue Service released a ruling¹¹⁴ in connection with a final adverse determination as to an application for recognition of tax‐exempt status by a nonprofit corporation operating as an accountable care organization. The organization sought IRS recognition of its tax-exempt status as a charitable organization and as a supporting organization public charity.

The organization was created as a nonprofit corporation for charitable, scientific, or educational purposes, and specifically to promote and support the interests and purposes of a healthcare system parent corporation. The system parent was itself a charitable organization and a publicly supported public charity.

The organization was formed as an ACO to achieve clinical care integration, coordination, and accountability among physicians practicing throughout the healthcare system. The ACO does not participate in the Medicare Shared Savings Program (“MSSP”).

The ACO does not engage in the direct delivery of medical care or provide health services. All of its time and resources are dedicated to the furtherance of the “Triple Aim” reform goals of the Affordable Care Act (i.e., reducing individual healthcare costs, improving patient access and quality of care, and improving population health and patient experience).

The ACO formed a clinically integrated network of healthcare providers through participation agreements that meet the ACO's eligibility and performance standards. Network participants include system physicians in independent practice groups who are members of the medical staff at system facilities, as well as physicians practicing at nonaffiliated hospitals and other healthcare systems. Approximately half of the participating physicians are in independent practices or affiliated with other hospitals and health systems.

The ACO is developing and implementing performance measures to assess the care delivery of its participating providers. It has established a data infrastructure for collecting, aggregating, and analyzing data. This includes an electronically integrated clinical information data warehouse and analysis, a patient satisfaction survey tool, and a clinical network infrastructure needed for tracking performance and sharing clinical data. It has implemented financial incentives to motivate network providers to improve their performance by tying their compensation to their collective success at achieving the Triple Aim goals using performance measures.

Under the ACO's participation agreements, it represents all participating providers, including the independent and nonaffiliated physicians, in an execution of agreements with third‐party payers. These agreements link rewards and penalties for participants to their achievement of performance measures in furtherance of the Triple Aim goals.

The IRS concluded that the ACO was not operated exclusively for exempt purposes and did not engage primarily in activities that accomplish one or more exempt purposes. It found that an insubstantial part of its activities were in furtherance of a nonexempt purpose. The IRS further concluded that the ACO was not operating primarily for a public purpose, but rather was operated for the benefit of private interests. As a result, an adverse determination was issued.

In determining that the organization did not qualify for charitable tax‐exempt status, the IRS relied upon the well‐established principle that not every activity that promotes health supports charitable tax‐exempt status. In addition, it noted that an organization is not a charitable institution if it is privately owned and run for the profit of the owners. The IRS cited the principle that the presence of a single nonexempt purpose that is substantial in nature will destroy the basis for exemption of an organization without regard to the number or importance of its other exempt purposes.¹¹⁵

In the ruling, the IRS distinguished between organizations that lessen the burdens of government (which was a key factor in recognizing exempt status for ACOs that participate in the MSSP) and those that do not. It noted that whether or not an organization is actually lessening the burdens of government is a facts and circumstances determination and that “an activity is a burden of the government if there is an objective manifestation by the governmental unit that it considers the activities of the organization to be its burden.”¹¹⁶ In the case of ACOs that participate in the MSSP, the IRS stated that the Affordable Care Act established the MSSP to promote quality improvements and healthcare cost savings. Accordingly, in the IRS's view, participation in the MSSP by an ACO furthers the charitable purpose of lessening the burdens of government within the meaning of its applicable regulations. The IRS concluded that, in contrast, the law does not provide an objective manifestation that the government considers ACO activities outside of the MSSP to be its burden, even if they further the overall Triple Aim goals of the Affordable Care Act.

The IRS also found it relevant that the organization was not created pursuant to a statute, managed by government officials, or funded by government grants, and there was no government oversight of its activities. In addition, the ACO was not engaged primarily in assisting Medicare and Medicaid beneficiaries, which could further the charitable purpose of relieving the poor and distressed.¹¹⁷

Much of recent healthcare activity has been focused on addressing population health and achieving the Triple Aim goals set forth in the Affordable Care Act and advocated for by thought leaders in this area.¹¹⁸ Nevertheless, the IRS found that while these goals generally promote health, they are not coextensive with charitable purposes, and not all activities that advance the Triple Aim goals are necessarily in furtherance of charitable purposes.

The IRS also cited its prior guidance that an individual practice association that provides health services through written agreements with a health maintenance organization does not qualify for federal income tax exemption as a social welfare organization when its primary activities are to serve as a bargaining agent for its members in dealing with a health maintenance organization and the performance of administrative claim services. In the IRS's view, such facts demonstrate that the organization operates in a manner similar to a for‐profit entity and that it benefits primarily its member‐physicians rather than the community as a whole.¹¹⁹

The IRS found that negotiating with private health insurers on behalf of independent healthcare providers is not a charitable activity. It also found that negotiation of payer agreements on behalf of nonaffiliated physicians only indirectly benefits the community as a whole. It determined that the negotiation of payer agreements by the ACO comprised a substantial part of its activities and conferred impermissible private benefit to participants who were not affiliated with the health system.

With regard to the ACO's request for recognition of public charity status as a supporting organization, the IRS concluded that even if it were a charitable tax‐exempt organization, the ACO would not be classified as a supporting organization because its networking and contracting activities on behalf of unaffiliated providers do not exclusively provide a benefit to the health system.

This is the first guidance published by the IRS that directly addresses the consequences of ACO operation outside of the MSSP. It is consistent with the analysis in its prior notice and fact sheet,¹²⁰ as well as its established position on the unavailability of tax exemption for most healthcare contracting entities such as PHOs and IPAs, and it answers the open question as to the consequences of non‐MSSP activity by the ACO.

The IRS analysis in this ruling suggests that where an ACO is able to qualify as a charitable organization because it primarily operates within the MSSP, but also has some insubstantial non‐MSSP activity, such as contracting with private payers, the IRS would be likely to treat any income from the non‐MSSP activity as unrelated business taxable income. This could also raise private business use concerns if ACO operations take place in facilities financed by tax‐exempt bonds.