WASHINGTON — The American Hospital Association has provided the Treasury Department and the Internal Revenue Service with recommendations about updating tax-exempt bond rules to accommodate incentives in President Obama's health care reform law.
Meanwhile, the tax-exempt financing committee of American Bar Association's taxation section has asked Treasury and the IRS to include on its priority list for 2014-2015 guidance concerning the financing facilities associated with a type of arrangement that can be entered into under the Affordable Care Act: accountable care organizations.
ACOs are health care organizations where doctors, hospitals and other providers join together to coordinate care for Medicare patients. They can include both taxable and tax-exempt participants, including hospitals and other organizations that are issuers or borrowers of tax-exempt bond financings.
Treasury regulations state that management contracts between a government or nonprofit user of tax-exempt bonds and a private service provider can give rise to private-business use. Under federal tax law, projects financed with governmental and 501(c)(3) tax-exempt bonds generally are subject to restrictions on the amount of private business they can have. Bonds for nonprofit hospitals could become taxable if there is excessive private business use and private payments for, or to secure, debt service.
Revenue Procedure 97-13 provides some safe harbors that, when followed, ensure management contracts will not result in private business use. The safe harbors generally put limits on the length of contracts and the methodology used to determine compensation under the contract. When a management contract does not meet one of the safe harbors, an issuer or borrower has to analyze the facts and circumstances of the contract.
In a call with Treasury and IRS officials last month, the AHA noted that the current rules as embodied in Rev. Proc. 97-13 are a barrier to hospitals and medical foundations using ACOs as well as other arrangements encouraged by the ACA, such as bundled payments and other shared savings programs.
"Rev. Proc. 97-13 prevents the types of arrangements that can effectively align incentives among physicians, hospitals, medical foundations and other health care service providers to meet the goals of the ACA," the AHA said in a letter dated June 12.
During the call, Treasury and IRS officials asked for suggestions on the types of quality measures hospitals or medical foundations use in management contracts that should be considered acceptable under private business use rules. They also wanted suggested language that would allow any new guidance issued to be retroactive.
In its letter, the AHA said that there are several public and nonprofit third-party organizations that develop and evaluate quality measures, which are tools that help to measure and track the quality of health care services.
"Management contracts between hospitals or medical foundations and physicians or other providers should not give rise to private use if they base incentive compensation on quality measures including those that have the added benefit of producing gains in the efficiency and effectiveness of care," the AHA said. "Further, such compensation should be permitted to be structured on a sliding basis without limit on its frequency. Finally, hospitals or medical foundations should have flexibility in the terms of the management contract in order to ensure the quality measures can be accomplished."
The AHA suggested that any new rules on management contracts and the ACA should generally apply for new arrangements after the guidance is effective, and that health care providers with outstanding bonds should have the option to apply the new rules retroactively.
The group recommended that new rules become effective 90 days after they are published so that providers with outstanding or proposed bond issues have time to digest them and do not have to apply them to agreements that have been negotiated but not yet signed.
The ABA taxation section submitted recommendations for the Treasury and IRS priority guidance plan on Tuesday. The IRS and Treasury use the plan to identify and prioritize tax issues that they should address through regulations and other documents. The 2014-2015 plan will identify projects that Treasury and the IRS intend to actively work on from July 1, 2014 to June 30, 2015.
In addition to guidance relating to ACOs and updates to Rev. Proc. 97-13 that include the expansion of safe harbors for management contracts, the ABA tax-exempt financing committee also wants to see several other items on the priority guidance plan.
One of these is guidance is on the definition of a political subdivision. This issue has become a particular concern since the IRS issued a technical advice memorandum last year arguing that the Village Center Community Development District in Florida is not a political subdivision that can issue tax-exempt bonds because its board does not and will not include elected officials.
The political subdivision issue was the subject of a discussion at a committee meeting in May, and the committee is working on comments to regulators about this issue.
The committee also recommended the guidance plan include final regulations relating to issue price, qualified hedges, bond financing of grants and the financing of working capital deficits. Treasury and the IRS released proposed regulations on these topics last September.
The ABA committee and other municipal bond market groups had significant issues with the proposed issue price rules. While the committee wants there to be final issue price rules, it wants the proposed rules to be withdrawn and reproposed with alterations first. The non-issue price portions of September's proposed regulations were viewed more favorably.
Additionally, the committee would like to see final regulations on public approval for private activity bonds as well as allocation and accounting provisions of the tax code relating to PABs. Treasury and the IRS issued proposed regulations on these topics years ago that were positively received but have yet to be finalized.
The committee also wants guidance on record retention requirements for tax-exempt and tax-credit bonds, including safe harbor guidance about keeping the forms requesting subsidy payments for direct-pay bonds.
