Non-MSSP accountable care organization denied exemption | KPMG | GLOBAL

IRS adverse determination: Non-MSSP accountable care organization denied exemption

Non-MSSP accountable care organization denied exemption

The IRS issued an adverse determination that denied tax exemption status to an accountable care organization that did not participate in the “Medicare shared savings program” (MSSP). The IRS concluded that the negotiation of payer agreements on behalf of unrelated healthcare providers does not constitute a charitable activity.


Related content

Read LTR 201615022 [PDF 10.2 MB] released April 8, 2016, and dated January 15, 2016.


An accountable care organization (ACO) is a healthcare organization characterized by a payment and care-delivery model that ties healthcare provider (e.g., physicians) reimbursements to quality metrics. 

In Notice 2011-20 [PDF 52 KB], the IRS set forth the criteria for demonstrating that that a tax-exempt organization’s participation in the MSSP through an ACO would not result in private inurement or private benefit. The the ACO must be structured in accordance with the following five factors:

  • Factor 1: The terms of the tax-exempt organization’s participation in the “shared savings program” through the ACO (including its share of shared savings or losses and expenses) are set forth in advance in a written agreement negotiated at arm’s length.
  • Factor 2: The Centers for Medicare & Medicaid Services (CMS)—the agency that administers the Medicare program—accepts the ACO into, and not has terminated the ACO from, the shared savings program.
  • Factor 3: The tax-exempt organization’s share of economic benefits derived from the ACO (including its share of shared savings payments) is proportional to the benefits or contributions the tax-exempt organization provides to the ACO. If the tax-exempt organization received an ownership interest in the ACO, the ownership interest received is proportional and equal in value to its capital contributions to the ACO, and all ACO returns of capital, allocations, and distributions are made in proportion to ownership interests.
  • Factor 4: The tax-exempt organization’s share of the ACO’s losses (including its share of shared losses) does not exceed the share of ACO economic benefits to which the tax-exempt organization is entitled.
  • Factor 5: All contracts and transactions entered into by the tax-exempt organization with the ACO and the ACO’s participants-and by the ACO with the ACO’s participants and any other parties—are at fair market value.

Importantly, the IRS notice provides that MSSP payments received by a tax-exempt organization from an ACO are substantially related to the performance of a charitable purpose of lessening the burdens of government. However, participation in an ACO that conducts non-MSSP activities generally would be unlikely to lessen the burdens of government—although certain non-MSSP activities might still further or be substantially related to an exempt purpose.

An IRS fact sheet [PDF 46 KB] issued in October 2011, shortly after the IRS notice, further clarifies that an ACO engaged exclusively in the MSSP could qualify for exemption under section 501(c)(3), provided that it meets all the other requirements of organizations described in that section. In addition, the IRS fact sheet notes that an ACO engaged in both MSSP and non-MSSP activities may qualify for recognition of section 501(c)(3) status provided its other activities accomplish charitable purposes and the ACO meets all of the other requirements for organizations described in section 501(c)(3).

Adverse determination

In LTR 201615022, a hospital system formed an ACO to serve as the legal and operational vehicle for achieving clinical care integration, coordination, and accountability among both employed and independent physicians. 

The ACO did not engage in the direct delivery of medical care, provide health services to the general public, or participate in the MSSP. Rather, the ACO operated to further the “triple aim” healthcare reform goals established by the Patient Protection and Affordable Care Act—(1) reducing healthcare costs for individuals; (2) improving patient access to and quality of care; and (3) improving population health and patient experience. The ACO intended to achieve these ends by tethering compensation for healthcare providers to the achievement of certain performance measures.

The IRS concluded that the ACO did not qualify for recognition of exemption under section 501(c)(3) because a substantial activity of the ACO was the negotiation of payer agreements on behalf of healthcare providers—approximately half of whom were not employed by the system or its hospitals—and generally, this is not a charitable activity. Additionally, the IRS found that the ACO was not lessening the burdens of government. 

Congress established the MSSP to be conducted through ACOs in order to promote quality improvements and cost savings in health care. Therefore, participation in the MSSP by an ACO generally would further the charitable purpose of lessening the burdens of government. In contrast, the Affordable Care Act does not provide an objective manifestation that the government considers non-MSSP-related ACO activities to be its burden, even if they ultimately further the legislation's overall goals.

KPMG observation

While the IRS initially indicated that non-MSSP ACOs might qualify for tax-exempt status, this adverse determination suggests that only certain ACOs will so qualify.  


For more information, contact the Managing Director-in-Charge of KPMG's Washington National Tax Exempt Organizations Tax group

D. Greg Goller |  +1 (703) 286- 8391 |

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