Commercial Accountable Care Organizations Denied Tax Exemption

May 09, 2016 - The Centers for Medicare & Medicaid Services (CMS) has undergone significant reforms in recent years in order to reduce wasteful healthcare spending and improve patient health outcomes around the country. Some of these changes include the creation of the Medicare Shared Savings Program and its subsequent accountable care organizations as well as the Comprehensive Care for Joint Replacement (CJR) model, which consists of providing bundled payments to facilities that perform joint replacement surgery.

Essentially, CMS has had a strong interest in broadening value-based care reimbursement throughout the country over the last several years. Both accountable care organizations as well as bundled payments bring more focused on reimbursing providers for the quality of care and outcomes instead of the volume of services such as in the fee-for-service payment system.

“Without a doubt, the industry is moving towards more value-based payment arrangements. Fee-for-service will never go away, but a growing portion of provider revenue streams and payer contracts will be value-based arrangements in some form or fashion.”

“So, does it improve quality? I believe that by definition, it has to. In the 1990s, we learned some valuable lessons about shifting risk. Providers lacked the ability to measure quality and the impact on quality and outcomes. Since then, we have made huge strides in understanding how to use data to define quality measures,” Gregory Scrine, Managing Principal at healthcare consulting company Lumeris, told HealthPayerIntelligence.com.

“The Triple Aim Plus One target, which is better care at lower cost, better patient experience, and greater provider satisfaction is the path to value-based care. If done right, it creates a virtuous cycle where the right behavior and higher quality are rewarded, and it creates greater participation and incentive to move towards value-based care delivery.”

As always, a major goal for the federal government is to decrease medical spending from  skyrocketing. A report from S&P Global Ratings explains that the Comprehensive Care for Joint Replacement (CJR) model will likely not significantly reduce revenue for hospitals and post-acute providers because these particular joint replacement procedures are only a small part of an organization's overall services.

However, the report does state that medical device manufacturers may begin to keep their prices low due to the bundled payment model being implemented by CMS across hundreds of hospitals. As such, the Comprehensive Care for Joint Replacement (CJR) model is expected to limit cost growth rates of specific orthopedic implantable devices.  Essentially, bundled payments could play a role in reducing healthcare spending between CMS and providers.

More importantly, bundled payments and the Comprehensive Care for Joint Replacement model will play an important part in bringing value-based care reimbursement to the medical industry. The report predicts that other health payers will adopt bundled payment models over the next several years.

“Healthcare reform, including a focus on reduced Medicare spending, has been pressuring reimbursement to health care service providers over the past few years. One goal is to transition from fee-for-service-based reimbursement (which aligns reimbursement with volume) to value-based reimbursement to encourage efficiency and discourage waste,” the report stated.

“Although Medicare has piloted various bundled payment programs and instituted other forms of value-based reimbursement in the past (for example, reimbursement penalties for hospitals with above-average readmissions), the CJR initiative represents a milestone as Medicare's first mandatory and wide-scale bundled payment initiative. We believe the broad scale and mandatory nature of this initiative, which contrasts with the voluntary participation in prior bundled payment programs, suggests Medicare is becoming more confident about structuring these value-based reimbursement plans and more proactive in launching them.”

Accountable care organizations and the Medicare Shared Savings Program also bring a greater focus on value-based care reimbursement for many hospitals and medical facilities. While ACOs that participate in the Medicare Shared Savings Program seem to have greater opportunity, commercial accountable care organizations operating outside of Medicare and partnering with private payers have been denied tax exemptions from the IRS, reports the National Law Review.

Essentially, accountable care organizations that are not participating in that particular Medicare program will have a much harder time qualifying for a federal income tax exemption. The IRS ruling excluded physicians employed by health systems that operate through an accountable care organization from the income tax exemption.

The exclusions  were also comprised of individual providers not affiliated with the health system. The IRS rules that the exemption should only be related to entities operating to reduce government burden and other charitable purposes.  

This means that the IRS feels that commercial accountable care organizations do not have a direct benefit or charitable purpose related to public good but instead its payment negotiations with private payers constitute a profitable, revenue-driven entity.

The National Law Review further mentions that medical facilities and hospitals that are tax-exempt should more carefully address their partnership with commercial accountable care organizations to avoid any potential ramifications of this IRS ruling.

Both accountable care and bundled payments are likely to see more advancement and transformation between public payers and providers in the coming years. As the push for accountable care organizations and value-based care reimbursement rises, the federal government is likely to continue investing its resources in developing alternative payment models geared toward the quality of care instead of the volume of services.

Dig Deeper:

Aetna, Mount Sinai Invest in Accountable Care Organizations

‘The Future is Accountable Care,’ Population Health Management