Rep. Jim McDermott, D-Wash., is urging the Treasury and the Internal Revenue Service to update 16-year-old safe harbor provisions for tax-exempt health care bonds so that they will not conflict with health care reform.

In a July 1 letter to Treasury assistant secretary for tax policy Mark Mazur, McDermott said that some of the safe harbor provisions inhibit “the ability of certain new payment models, such as accountable care organizations [ACOs], to flourish.”

Under the 2010 Patient Protection and Affordable Care Act, ACOs would be set up to coordinate and manage health care to reduce costs while mandating a certain level of quality care. They would be made up of tax-exempt governments and non-profit hospitals or other organizations that join together with private parties such as physician groups and suppliers.

However, tax guidance, such as Rev. Proc. 97-13, effectively limits the amount of private involvement in such arrangements. That guidance sets forth the type of compensation packages that could be used to avoid exceeding private use limits, but they are outdated.

McDermott, a ranking member of the House Ways and Means Committee’s subcommittee on health, said that he is interested in initiatives that advance better coordinated care among hospitals, physicians and other health care professionals.

He said he is aware that there are implications for tax-exempt bond financed facilities that attempt to structure their contractual agreements to fit within safe harbors of Rev. Proc. 97-13.

“The safe harbors are narrow and limit the terms of such arrangements,” McDermott wrote. “Also, the safe harbors limit the types of permissible compensation arrangements and may not address innovative payment methods such as payment bundles.”

“Stakeholders generally structure arrangements to fit squarely within a safe harbor with respect to their compensation arrangements, as they are aware that the IRS is closely scrutinizing these issues,” McDermott wrote. “As a result, hospitals have some anxiety with entering into new and innovative arrangements encouraged by the Affordable Care Act.”

McDermott said that Rev. Proc. 97-13 should be updated to recognize the newly emerging compensation models between hospitals and physicians. He added that it is imperative that the IRS consider such modifications immediately because the Obamacare models that emerge from the Center for Medicare and Medicaid Innovation may be rapidly expanded throughout the country.

The National Association of Bond Lawyers has expressed the same concerns about ACOs and Rev. Proc. 97-13. NABL wrote to the IRS and Treasury Department in April urging them to develop guidance on private business use tests for ACOs and other arrangements entered into under Obamacare.

NABL is concerned that Obamacare imposes a number of requirements on health care providers and hospitals and encourages partnerships between exempt organizations and entities that would otherwise be treated as private business users of tax-exempt bond-financed facilities. To the extent that the partnerships are treated as private users, this could give rise to private business use that jeopardizes the tax-exempt status of the bonds.

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