IRS ruling denying tax exemption poses barriers to ACOs

A ruling by the Internal Revenue Service poses a major obstacle to accountable care organizations as they seek ways to control costs while providing greater coordination of care. According to The New York Times, the IRS denied a tax exemption sought by an ACO that is geared toward people with commercial insurance.

The IRS said the ACO did not meet the criteria for tax-exempt status because it does not operate exclusively for charitable purpose and it provides private benefits to some of the physicians in its network, according to the report. The ACO's name and location were not disclosed, but it is known that the entity was formed by a nonprofit healthcare system.

The ruling does not impact Medicare ACOs, but it could affect other ACOs that serve privately insured patients, according to The New York Times.

ACOs now cover more than 28 million people, according to healthcare consulting firm Leavitt Partners, as cited in the report. Many of these entities coordinate care for both Medicare beneficiaries as well as those with commercial coverage.

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," according to the report. In a letter asking the agency to reconsider its position, Ms. Hatton wrote, "The IRS ruling is in conflict with the direction that the Department of Health and Human Services has given to the hospital field." She said it is critical for the government to clarify that hospitals can participate in ACOs without "incurring the catastrophic loss of their tax-exempt status."

The IRS acknowledged that the organization in question was working to improve the quality of care, lower costs and improve the health of the community, but it has also negotiated agreements with insurers on behalf of physicians, which is not a charitable activity.


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