A Failure to Communicate: Tax Court Denies Exemption to Accountable Care Organizations
Cool Hand Luke, 1967
ObamaCare’s most famous tax exemption provision is probably IRC 501(r), relating to community health needs assessments, financial assistance, and nonprofit hospital billing practices. The whole thing sought to impose pricing and consumption discipline on health care suppliers and consumers in an effort to increase supply and decrease the population of uncared for people. Its all very complicated and socialized, requiring reciprocally grinding regulatory gears at both federal and state levels. Less well known tools adopted in ObamaCare is the Accountable Care Organization and the Shared Savings Program. In short form an ACO is a managed care organization and, like all managed care organizations, ACOs seek to coordinate and control the costs of health care with the goal of making health care affordable to more people:
Accountable Care Organizations place financial responsibility on providers in hopes of improving patient management and decreasing unnecessary expenditures while providing patients with the freedom to select medical service providers. The Accountable Care Organizations model promotes clinical excellence while simultaneously controlling costs. This cost-control depends on the Accountable Care Organization’s ability to incentivize hospitals, physicians, post-acute care facilities, and other providers to form partnerships and promote better coordination of care delivery. By increasing care coordination, Accountable Care Organizations hope to reduce unnecessary medical care and improve health outcomes. According to the Centers for Medicare and Medicaid Services (CMS) estimates, the Accountable Care Organization’s implementation is estimated to result in a median savings of $470 million from 2012 through 2015.
Accountable Care Organizations (ACOs) were a significant component of the Affordable Care Act as they proposed a method for cost containment within the healthcare system. As the healthcare field shifts from the traditional fee-for-service (FFS) model, alternative payment schemes have focused on ACOS and BPCIs.
Typically, Accountable Care Organizations consist of a large payer, like an insurance company, coupled with a large group of healthcare providers. In addition, there are large employers that are taking advantage of the shared savings, partnering with healthcare systems, and removing the insurers altogether. The design of an Accountable Care Organization is based on the principle that each provider will be held accountable for the cost and quality of the care provided, prevention of disease, and avoidance of waste.
As near as I can tell, ACO’s manage health care provided to Medicare and Medicaid patients, as well as privately insured patients, and if the organizations meet certain pricing and efficiency benchmarks, they receive medicare shared savings payments, determined as a percentage of net savings achieved. A quick literature review proves that this stuff makes Subchapter K look like “See Dick Run.” No kidding.
The tax part of this is probably the easiest, though I am not sure Chief Judge Kerrigan’s memorandum opinion jives with ObamaCare’s intentions. I certainly don’t think the conclusion that ACOs like this can’t be exempt at all is one required by law. I am not even sure I understand why Treasury would take that position but that is what happened.
ACOs negotiate with private insurance companies whereby those insurers provide rebates to the ACO when pricing and efficiency benchmarks, negotiated between the ACO and private insurers, are met. Judge Kerrigan’s opinion notes very early on that commercial insurers benefit from the ACO’s health management practices, saving about $15 million per year for the relevant years. Part of the savings are shared with the ACO, and the ACO, in turn, shares those commercial payments with physician practice plans, whose cooperation is necessary to the whole effort. In relevant years, the ACO shared between $18 and $42 million dollars with healthcare providers. Nonprofit health care, more than any other exempt activity, requires that all three sectors — business, government, and civil society — sleep in the same bed. Tax exemption jurisprudence, insofar as health care is concerned, still thinks of this as unnatural miscegenation.
To summarize: ACO manages health care, receives rebates if care and pricing benchmarks are met, and may share those rebates with other participants whose cooperation is necessary. The other participants are typically for-profit insurers or physician practice plans. The question is whether the ACO operates for private benefit. Judge Kerrigan said it does and therefore the ACO can’t be exempt, not even as a (c)(4).
For reasons I explained in an earlier post, but still don’t quite understand, a managed care organization can be exempt under IRC 501(c)(3) only if it is a staff model HMO. In Memorial Hermann Accountable Care Organization v. Commissioner, the ACO was more like a group model HMO, meaning it contracted with physician practices to provide care to its members. It has no physicians on staff so its not a staff model HMO. In fact, there aren’t very many staff model HMOs left. Only 15 in the whole country. Which means very few 501(c)(3) HMOs. Most HMOs are exempt, if at all, under IRC 501(c)(4), and they usually rely on patient volume to negotiate lower pricing and efficient allocations of services. Not kickbacks, not even kickbacks sanctioned by Congress.
That’s what ACOs participating in the shared savings programs are allowed to do, pay kickbacks to insurers (in the form of lower payments from insurance companies) and physicians. The term “rebate” is more accurate because its doesn’t carry the pejorative connotation, but its all the same. The important point, ultimately, is that private parties benefit from the ACO’s efforts. That, apparently, is what bothered Treasury and motivated it to deny even (c)(4 exemption. From a farther vantage, the case proves that there is a failure to communicate between Treasury and SSA. SSA is working to expand health care and reduce costs pursuant to statutory mandate, while Treasury and the Tax Court are denying tax exemption to otherwise qualifying (c)(4) organizations doing precisely what ObamaCare wants them to do. Said the judge:
Respondent does not disagree that petitioner is a civic organization organized not for profit. Rather respondent argues that petitioner does not operate exclusively for the promotion of social welfare. Respondent asserts that “petitioner does not primarily promote the common good and general welfare of the Greater Houston Community because it operates primarily for the benefit of commercial payors.”
. . .
Petitioner fails to qualify as an organization described by section 501(c)(4) because its non-MSSP activities primarily benefit its commercial payor and healthcare provider participants, rather than the public, and therefore constitute a substantial nonexempt purpose. While petitioner’s stated goal of providing affordable healthcare to patients is an admirable one, the provision of healthcare alone is insufficient to qualify for recognition of exemption under section 501(c)(4). See Vision Serv. Plan, 2005 WL 3406321, at *4. Petitioner’s non-MSSP activities benefit primarily the commercial payors and healthcare providers with which it contracts. To that end, petitioner contravenes the requirements of section 501 by conducting business with the public in a manner similar to a for-profit business. See Treas. Reg. § 1.501(c)(4)-1(a)(2)(ii).
By the way, the ACO collects no fee from patients. It is merely an incentivized health care services broker committed to making controlling health care costs. I get that private businesses profit from the whole deal. Insurance companies pay lower costs, made possible by the ACOs patient volume (in effect, insurers get rebates on the front end) and physician practice plans get rebates on the back end. But why is that private benefit intolerable? You can never achieve public good without private benefit. There is just no way around it. A university or nonprofit hospital has to pay market rate for its inputs, and vendors — professors, nurses, doctors, food service companies, whatever — necessarily benefit and without that benefit a university could not achieve public good.
darryll jones