Fraud and Abuse, Tax-Exempt and Antitrust Implications of ACO Participation in the Medicare Shared Savings Program

Christine L. Noller, J.D., L.L.M
Vezina Law Group
cnoller@vezinalaw.com

On January 10, 2013 the US Department of Health and Human Services (DHHS) Secretary Kathleen Sebelius announced that physicians and healthcare providers formed 106 new Accountable Care Organizations (ACOs) in Medicare extending access to high quality, coordinated care to 4 million beneficiaries. Since passage of the Patient Protection and Affordable Care Act (ACA) more than 250 ACOs have been established. The next application period for organizations that wish to participate in the Medicare Shared Savings Program (MSSP) beginning in January 2014 is summer 2013. Providers considering ACO participation may express concern regarding referral prohibitions under existing Fraud and Abuse laws and the availability of waivers therewith. This article will focus on issues facing ACOs in obtaining waivers of Fraud and Abuse laws from the Secretary of DHHS allowing them to participate in the MSSP.

Under the program, payments continue to be made to providers of services and suppliers participating in an ACO under the original Medicare fee-for-service program in the same manner as they would ordinarily except that a participating ACO is eligible to receive payment for shared savings if the ACO meets quality performance standards and has achieved savings against an appropriate benchmark of expected per capita Medicare fee-for-service expenditures. Notwithstanding the legislative intent of the ACA, existing Fraud and Abuse laws would prohibit the distribution of shared savings among hospitals, physicians and other individuals and/or entities comprising those ACOs that participate in the MSSP.

As the Secretary of the DHHS has the ability to waive the requirements of Federal Fraud and Abuse laws, on November 2, 2011 the Centers for Medicare and Medicaid Services (CMS) and the DHHS Office of the Inspector General (OIG) jointly issued an interim final rule (IFC) establishing waivers of the Physician Self-Referral law, the Federal Anti-kickback statute and certain provisions of the civil monetary penalty law (CMP) in connection with the MSSP.

These waivers cover (1) start-up arrangements that predate the ACO’s participation agreement; (2) arrangements of an ACO, one or more of its participants or its providers/suppliers, (3) distributions or use of ACO earned savings; (4) financial relationships between and among the ACO, its participants and providers implicated the Physician Self-Referral law and (5) items or services provided by an ACO, its participants, providers/suppliers to beneficiaries for free or below fair market value. Each waiver is subject to specific conditions.

Waiver authority does not extend to any other laws or regulations including the Internal Revenue Code (IRC). Furthermore, nothing in the IFC affect obligations of individuals or entities including tax-exempt organizations to comply with the IRC. Therefore, guidance was provided by the Internal Revenue Service (IRS) in considering the application of the provisions of the IRC governing tax-exempt organizations to hospitals or other health care organizations recognized as tax-exempt organization under Section 501(c)(3) participating in the MSSP.

The IRS anticipates that tax-exempt organizations will be participating in the MSSP through an ACO along with private parties, including some that might be considered insiders with respect to the tax-exempt organization. To avoid adverse tax consequences, the tax-exempt organization must ensure that its participation in the MSSP through the ACO is structured to not result in its net earnings inuring to the benefit of insiders or its being operated for the benefit of private parties participating in the ACO. The IRS will not consider a tax-exempt organization’s participation in the MSSP to result in inurement or impermissible private benefit to the private party ACO participants if (1) the terms of the tax-exempt organization’s participation are set forth in advance in a written agreement at arm’s length; (2) CMS has accepted the ACO into the MSSP; (3) the tax-exempt organization’s share of economic benefits derived from the ACO is proportional to the benefits of contributions it provides to the ACO; (4) the tax-exempt organization’s share of losses does not exceed the ACO economic benefits to which it is entitled and (5) all contracts and transactions entered into by the tax-exempt organization with the ACO and its participants and any other parties are at fair market value.

Participation of tax-exempt organizations in ACOs also raise questions of whether the share of MSSP payments received by the tax-exempt organization will be subject to unrelated business income tax (UBIT) under IRC 511. However, the IRS expects that, absent inurement or impermissible private benefit, any MSSP payments received by a tax-exempt organization from the ACO would derive from activities that are substantially related to the performance of the charitable purpose or lessening the burdens of government within the meaning of Treas. Reg. 1.501(c)(3)-1(d)(2) and would not result in unrelated taxable income subject to UBIT imposition.

There are also antitrust implications relative to ACO formation and operation. In conjunction with the CMS IFC the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) developed a policy statement setting forth an antitrust safety zone for those ACOs that are highly unlikely to raise significant competitive concerns. For an ACO to fall within the safety zone, independent ACO participants providing the same service may not have a combined share exceeding 30 percent of common service in each participant’s service area (PSA). An ACO that exceeds the 30 percent PSA may fall within the safety zone if it qualifies for the rural exception. ACOs falling outside the safety zone may still be procompetitive and lawful so long as they don’t impede a competitive market. Suspect conduct raising competitive concerns include improper sharing of competitively sensitive information and other conduct preventing private payers from obtaining lower prices and better quality service for their enrollees.

A full understanding of the DHHS waivers is essential to the ACO planning process. Careful consideration must be given not only to the waiver’s eligibility conditions but also Federal income tax implications to tax-exempt organizations. Federal antitrust law imposes equally stringent criteria by which ACOs will be evaluated as to whether they are impeding the functioning of a competitive market raising competitive concerns. Therefore, providers healthcare organizations must give careful attention to multi-agency requirements inherent with ACO participation in the Medicare Shared Savings Program.