Groups: IRS Guidance on ACOs is Too Narrow

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WASHINGTON — The Internal Revenue Service's interim guidance on how certain accountable care organizations can be structured to avoid resulting in private business use is too limited in its scope, the National Association of Bond Lawyers and the American Hospital Association said.

The scope of the guidance may be too narrow "given the need for broad guidance in analyzing the private business use implications of arrangements contemplated by the Affordable Care Act," NABL said in its comments.

NABL and AHA submitted separate comments about the guidance earlier this month. The IRS released Notice 2014-67 providing interim guidance on ACOs and management contracts in October and asked for comments on it to be submitted by Jan. 22.

The part of the interim guidance on ACOs applies to bonds sold on Jan. 22 or later, but can be applied to bonds sold earlier. The portion on management contracts applies to contracts that are entered into, materially modified or extended on or after Jan. 22, but can be applied to contracts entered into before then.

ACOs are health care organizations where doctors, hospitals and other providers join together to coordinate care. They can include both taxable and tax-exempt participants, including hospitals and other organizations that are issuers or borrowers of tax-exempt bond financings. There has been some concern that ACOs could give rise to private business use in hospitals financed with governmental or 501(c)(3) bonds.

Under federal tax law, governmental or 501(c)(3) tax-exempt bonds can become taxable if the projects they finance have excessive private business use. Bonds generally are considered private-activity bonds if more than 10% of the proceeds are used for private business and more than 10% of the debt service is payable from, or secured by, a private party. The thresholds for these "private business use" and "private payment" tests are lowered to 5% when determining whether bonds issued for 501(c)(3) organizations are tax exempt.

ACOs can participate in the Medicare Shared Savings Program created as a result of the ACA. If participants in the program spend less than a benchmark amount and provide a certain level of care for Medicare beneficiaries, they will be eligible to receive payments from the federal government for some of the savings.

The guidance gives a list of criteria that, if all met, will prevent a government or nonprofit from having private-business use in its tax-exempt bond financed facility solely because it participates in the MSSP through an ACO.

Both AHA and NABL pointed out that the criteria do not apply to many health care arrangements.

"While this guidance is helpful, it is limited to ACOs that serve Medicare patients through the MSSP, and does not address the fact that an important element of the ACA is to promote the development of ACO-type arrangements with non-Medicare payers," AHA said. The group wants the guidance to be expanded to also apply to ACOs that involve private payers and not just Medicare.

"The tax-exempt bond rules should not distinguish between comparable ACO-type arrangements solely on the basis of whether the payer is Medicare or a private insurer," AHA said.

NABL said that there are other health care delivery arrangements besides ACOs part of the MSSP for which there is no guidance. "Guidance may be helpful to confirm that these arrangements, similar to ACO arrangements accepted into the MSSP, can avoid private business use issues," the group said.

NABL Comments on ACOs

NABL President Tony Martini told The Bond Buyer that the group's comments are based on the fact that the health care landscape is rapidly changing. The group wants to make sure the guidance is flexible and takes into account developments in the sector, he said.

The bond lawyers' group wants the IRS to clarify that the criteria are a safe harbor for purposes of determining whether participating in an ACO leads to private business use, and that the criteria doesn't displace any existing guidance about when arrangements give rise to private business use.

NABL also wants clarification on what "participation" in an ACO means. Regulations relating to the MSSP include a definition of an "ACO participant," but NABL doesn't believe that the IRS intended to use that definition when it used the term "participation" in the October notice, according to the group's s comments and Matthias Edrich, a shareholder at Greenberg Traurig and the chair of NABL's tax-law committee.

Additionally, NABL had comments about the most of the specific criteria.

One of the criteria is that the terms of a government's or nonprofit's participation in the MSSP through an ACO needs to be set forth in advance in a written agreement. NABL said that frequently, some terms may not be set until after ACOs are approved to participate in the MSSP.

Another is that the government's or nonprofit's share of the benefits from the ACO has to be "proportional" to the benefits or contributions it provides to the ACO. A third is that the entity's share of the ACO's losses cannot be greater than the share of the benefits it would be entitled to receive.

"We request that these requirements be clarified to confirm that the determination of the share of economic benefits to be received by a qualified user may be separate from the determination of the share of losses allocated to a qualified user, and may also be separate from the determination of the proportion of ownership interest received and the return of capital, allocations and distributions," NABL said. Also, it may be difficult to measure economic benefits derived from being part of an ACO, the group said.

"We believe that separating the evaluation of shared savings losses from shared savings payments and allowing for a broader evaluation of economic benefits and costs of ACO participation more closely reflects the economic realities underlying ACO arrangements," NABL said.

Another of the criteria is that contracts and transactions involving the ACO, including those between a user of tax-exempt bond proceeds and the ACO, be at fair market value. NABL said this requirement would be difficult to implement since there isn't an established market for shared savings arrangements. The group requested that it be modified "to provide only that a qualified user must negotiate at arm's-length the terms of any such contract or transaction that affect its interests."

The government or nonprofit cannot transfer property financed with tax-exempt bonds to the ACO unless the ACO is a government, or, in the case of 501(c)(3) bonds, either a government or nonprofit. The IRS should confirm that this requirement doesn't prohibit a governmental or nonprofit hospital from allowing an ACO to use space in its bond-financed facility, so long as that use is within the hospital's private business use and private payment limits, NABL said.

Management Contracts

The IRS notice also included a new safe harbor for when management contracts do not give rise to private business use. It expands the types of productivity rewards that can be used in management contracts.

The new safe harbor is broadly applicable and does not just apply in the health care sector.  It provides that a management contract will not result in private business use if it is five years or less and all of the compensation for services is based on a stated amount, periodic fixed fee, capitation fee, per-unit fee or a combination of the above. The compensation can include a percent of either, but not both, revenues or expenses of the bond-financed facility.

NABL said it "greatly appreciates" the guidance on management contracts and had two suggestions for amendments.

One of NABL's suggestions is to define the term "stated amount." The other suggestion is to expand the safe harbor to apply to contracts that include compensation in the form of incentive payments based on maximizing revenue or minimizing expenses, but not both. Sometimes contracts, particularly in the health care sector, include compensation of a fixed amount if revenues are greater than a certain threshold or expenses are below a specific threshold, NABL said.

"If compensation based on a percentage of revenue or expenses is covered by the management contract safe harbor, incentive payments based on exceeding revenue threshold(s) or falling below expense threshold(s) (but not both) should also be covered," NABL said.

Martini said that NABL is working on other comments it plans to send to the IRS and the Treasury Department that look more broadly at the guidance on management contracts released in 1997.

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