A new IRS ruling could spell trouble for some ACOs

The ruling 'appears to be a serious obstacle' to care coordination for some hospitals, an AHA official

Experts say that IRS's recent decision to deny tax-exempt status to an ACO that coordinates care for privately insured patients could spell trouble for ACOs that don't participate in Medicare, Robert Pear writes for the New York Times.

IRS disclosed that the ACO was created by a not-for-profit health system, but did not publish the organization's name or location. In its ruling, IRS noted that the ACO was trying to advance the triple aim of health care—boost care quality, reduce health care costs, and improve community health—but said the ACO did not qualify for tax-exempt status because it did not operate solely for charitable purposes.

IRS said that organizations can be tax-exempt if they are organized and operated only for "religious, charitable, scientific, testing for public safety, literary, or educational purposes." However, since the ACO negotiated contracts with payers on behalf of physicians—which IRS said is not a charitable activity— it did not meet that test. "The presence of a single substantial nonexempt purpose destroys the exemption, regardless of the number or importance of the exempt purposes," the agency said.

IRS noted that participating in Medicare can qualify an ACO for tax-exempt status because participation furthers "the charitable purpose of lessening the burdens of government."

However, to the ACO seeking the tax exemption, IRS wrote, "You 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" a Medicare ACO.


Tax expert T. J. Sullivan says that the ruling could mean other ACOs that only serve commercial patients will face "an uphill battle" in trying to qualifying for federal income tax exemption.

MACRA means big changes—but how should it change your value-based care strategy?

Melinda Hatton, general counsel and SVP for the American Hospital Association, says the ruling "appears to be a serious obstacle for [not-for-profit] hospitals striving to coordinate care for their communities."

In a letter urging IRS to reconsider its position, Hatton said the ruling "is in conflict with the direction that [HHS] has given to the hospital field." She called on the federal government to clarify that hospitals can participate in ACOs without "incurring the catastrophic loss of their tax-exempt status" (Pear, New York Times, 5/29; Sampson, RevCycleIntelligence, 4/27).

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