Today, led by Chief Justice John Roberts, the Supreme Court upheld the constitutionality of the Affordable Care Act in almost all respects. While upholding the controversial individual mandate to purchase health insurance, the Court did alter one important aspect of the law, however, in that it limited the government’s ability to withhold all Medicaid funds from a state contingent on the states’ acceptance of the significant Medicaid expansion called for under the Act. Under the Court’s ruling, a state must be allowed to opt out of the Medicaid expansion without threatening the state’s current Medicaid coverage and federal funding. The text of the decision can be found here.
In a recent report, the Treasury Inspector General for Tax Administration (TIGTA) audited Internal Revenue Service (IRS) efforts to implement the Affordable Care Act (ACA) tax provisions. The report found that:
The IRS has revised Form 990 Schedule H to require hospitals to report on their financial assistance policies and community health benefits as required to maintain tax-exempt status under the ACA. The ACA requires the IRS to review at least once every three years the community benefit activities of tax-exempt hospitals subject to these new exemption requirements and the IRS expects to complete reviews of the activities of 1,700 hospitals by the end of calendar year 2011 out of the approximately 5,100 hospitals subject to the new tax-exemption requirements.
Also, in consultation with the Department of Health and Human Services (DHHS), the IRS is required to provide annual reports to Congress on (i) the levels of charity care, bad debt expenses, and unreimbursed costs for services provided under government programs by private tax-exempt, government-owned, and taxable hospitals and (ii) costs incurred by private tax-exempt hospitals for community benefit activities. The TIGTA report indicates that the IRS is starting to collect some of this information for private tax-exempt hospitals from the revised Form 990 Schedule H, but the IRS is exploring the need to enter into a memorandum of understanding with DHHS to help clarify data responsibilities regarding the preparation of this report. The TIGTA report does not mention that such a memorandum of understanding may be needed because the IRS currently does not have any mechanism to collect such data with regard to government-owned and taxable hospitals.
On March 31, 2011, the Internal Revenue Service (IRS) issued Notice 2011-20, which considers the federal income tax implications to those hospitals and other health care organizations described in Code Section 501(c)(3) that seek to participate in the Medicare Shared Savings Program through an accountable care organization (ACO). This update summarizes the most significant conclusions of Notice 2011-20 for tax-exempt organizations and highlights some areas where additional guidance may be most needed.
What We Know From Notice 2011-20
In Notice 2011-20, the IRS provided tax-exempt organizations with initial guidance regarding the circumstances under which their participation in the Medicare Shared Savings Program through an ACO would not put at risk their tax-exempt status and would not cause any income they may receive from the ACO to be treated as unrelated business taxable income (UBTI). In particular, the IRS provided the following guidance—
- Private Inurement and Private Benefit: The IRS “expects that it will not consider a tax-exempt organization’s participation in the Medicare Shared Savings Program through an ACO to result in inurement or impermissible private benefit” if the following conditions are satisfied: the ACO has been admitted into, and not been terminated from, the Medicare Shared Savings Program; the tax-exempt organization’s ownership interest in the ACO, if any, is proportional to the exempt organization’s capital contributions; allocations, distributions and returns of capital are in proportion to ownership interests; the exempt organization’s share of losses does not exceed its share of income or gain; and contracts and other transactions between an ACO and its tax-exempt and taxable participants are at fair market value.
- Unrelated Business Taxable Income: The IRS expects that any Medicare Shared Savings Program payments received by a tax-exempt organization from an ACO will be deemed to be from activities substantially related to the performance of the charitable purpose of lessening the burdens of government (i.e., relieving the government of its burden of providing Medicare to those in need) and will not be treated as UBTI if the ACO meets all of the eligibility requirements established by CMS.
While this initial guidance from the IRS provides some assurance that tax-exempt organizations generally will be able to participate in the Medicare Shared Savings Program through an ACO without adverse federal income tax consequences, Notice 2011-20 leaves a number of important questions unanswered.
Today, several federal agencies issued proposed rules or notices regarding Accountable Care Organizations (ACOs)—
- CMS issued a proposed rule that establishes ACOs under the Medicare Shared Savings Program.
- HHS OIG and CMS jointly issued a notice with comment period addressing proposals for waivers for the anti-kickback statute, the physician self-referral law and certain provisions of the civil monetary penalty law, as related to the Shared Savings Program. They also issued a solicitation for comments on additional waivers for program as well as for separate waiver authority for the Center for Medicare and Medicaid Innovation.
- FTC and DOJ jointly issued a proposed antitrust policy statement for ACOs participating in the Shared Savings Program.
- The IRS issued a request for comments addressing guidance for tax-exempt organizations participating in the Shared Savings Program through ACOs.
The Patient Protection and Affordable Care Act (PPACA) added new requirements that 501(c)(3) hospital organizations must satisfy to maintain their tax-exempt status. Because many of these provisions are effective for tax years beginning after enactment, revision of Form 990, Schedule H (Hospitals) and its instructions has been a priority for the IRS. Learn more about the new requirements for 501(c)(3) hospitals and implementation efforts on IRS.gov.
In order to complete implementation of changes to IRS forms and systems that are required to reflect additional requirements for charitable hospitals, the IRS is delaying the start of the 2010 filing season for certain tax-exempt organizations that operate one or more hospitals (hospital organizations) required to file Form 990, Schedule H (Hospitals). Hospital organizations may not file 2010 Forms 990 with Schedules H attached before July 1, 2011.
Pursuant to Announcement 2011-20, the IRS has granted an automatic three-month extension of time to file the Form 990 to hospital organizations with filing due dates before August 15, 2011. For more information about the delayed filing season for hospital organizations and frequently asked questions, please go to IRS.gov.
In late January, Representative Erik Paulsen (R-MN), along with 41 bipartisan cosponsors, introduced the Protect Medical Innovation Act of 2011 (H.R. 436) in the House of Representatives. Senator Orrin Hatch (R-UT) introduced companion legislation, Medical Device Access and Innovation Protection Act (S. 17). If enacted, the bill provides for the immediate repeal of the excise tax on medical device sales that was passed last year as a part of the Patient Protection and Affordable Care Act (PPACA). The tax was included in PPACA as a revenue-raising provision, however, opponents of the tax claim that it will hamper innovation and send manufacturing jobs abroad. Other similar pieces of legislation to repeal the medical device tax have been introduced by Senator Scott Brown (R-MA) (S. 262) and Representative Jim Gerlach (R-PA) (H.R. 488).
On November 1, 2010, the IRS announced the names of the companies that received tax credits or grants under the Qualifying Therapeutic Discovery Project program. The program was created as part of the Patient Protection and Affordable Care Act to promote the development of therapeutic drugs. Eligible companies had to have no more than 250 employees. The IRS, in conjunction with the Department of Health and Human Services, approved applications for projects that showed significant potential to produce new and cost-saving therapies, support jobs and increase U.S. competitiveness.
Under the program, a total amount of $1 billion was allocated for credits and grants with a $5 million limit per each eligible applicant. Since awards were made by project, companies were eligible to receive funding for multiple projects, each worth up to $244,479.24, designed to offset 50 percent of qualifying research and development costs.
On Friday, June 18, the IRS and HHS released application materials related to the Qualifying Therapeutic Discovery Project program (QTDP) which was established under the Patient Protection and Affordable Care Act. The QTDP allows small companies that undertake certain biomedical research projects to apply for and receive tax credits or grants of up to 50 percent of the qualified investment made toward such research. The application materials released on Friday include IRS Form 8942 and the accompanying Project Information Memorandum form. The IRS will review Form 8942 to determine whether the company and its stated investment meet the statutory requirements for the program, and also whether the project is likely to create jobs and increase competitiveness in the United States. HHS, through the NIH, will review the information provided in the Project Information Memorandum to determine whether a project meets the definition of a “qualifying” research project, if so, whether it shows a “reasonable potential” to result in new therapies, reduce long-term health care costs, or advance the goal of curing cancer. With the release of these application forms, the IRS has officially begun to accept applications for certification under the program. Completed applications are due to IRS by no later than July 21, 2010. The IRS expects to issue certifications for approved research projects by the end of October. IRS posted the following application documents to its Web site, in addition to its press release—
HHS posted the following application-related documents to the the NIH Office of Extramural Research Web site—
- Project Information Memorandum
- Several documents that describe the process by which HHS will review and “score” applications according to the specified criteria, including the QTDP Reviewer Response Sheet and a flowchart of the QTDP Review Process.
All of the application materials, along with several new Q&A documents, can be accessed on the NIH Web site.