Healthcare Business News

Pinched by the ACA

AHA looks to IRS for relief on tax-exempt debt

By Melanie Evans
Posted: November 24, 2012 - 12:01 am ET

Accountable care and bundled-payment deals made possible by the healthcare reform law could jeopardize not-for-profit hospitals' access to tax-exempt financing, the American Hospital Association said last week as it urged regulators to revamp rules.

The trade group is lobbying the Internal Revenue Service to create an exemption under the private-use rule for tax-exempt debt for several payment models and reimbursement provisions in the Patient Protection and Affordable Care Act.

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Not-for-profit hospitals borrow heavily in tax-exempt markets where historically, interest rates are lower than taxable markets. That remains true even though favorable taxable interest rates and less regulation have drawn some health systems into the taxable market for the first time.

The rules “present a barrier” to ACOs and bundled payments and “prevents the types of arrangements that can effectively align incentives among physicians, hospitals and other healthcare service providers to meet the goals” of value-based purchasing and readmission reduction programs, the AHA said in a letter to the IRS.

Projects financed with tax-exempt debt, such as hospital construction, must be used almost entirely to meet an organization's tax-exempt purpose under the private-use rule. No more than 5% of such projects can be used by for-profit businesses, such as independent medical groups or national restaurant chains, through lease or other contractual agreements.

The rule seeks to prevent for-profit businesses from benefiting from the tax-exempt financing available to not-for-profit organizations, said John Chesley, a healthcare attorney with Ropes & Gray in San Francisco. The rule sets limits on contracts that resemble joint ventures—contracts that allow for-profits to potentially share in the profit and risk of not-for-profit partners, he said.

Accountable care deals offer hospitals and physicians, some of whom may be independent and for-profit, incentives to jointly contract to share potential savings and losses. The Medicare shared-savings program for ACOs was launched in April with 27 contracts among hospitals, physicians and Medicare for incentive-based payments tied to quality and cost-control measures. The program expanded in July with another 89 contracts, and the CMS is scheduled to enter into another wave of contracts to begin Jan. 1.

Existing exceptions, or safe harbors, for the rule governing tax-exempt financing may be too limited for accountable care payments if the government decides that the deals qualify as management contracts under the rule, the AHA said in a May letter to the IRS. Meanwhile, bundled payments could threaten not-for-profit hospitals' access to tax-exempt bonds because they may not fit within the safe harbor's definition of provider compensation.

Last week, the trade group proposed draft regulation that would add safe harbors for seven Affordable Care Act programs with incentives or payment penalties. The exceptions include the bundled payment initiative, Medicare shared-savings program, hospital readmission reduction program, hospital-acquired condition penalties and the FDA safe-use initiative.

The AHA wrote that the IRS should issue guidance that recognizes the programs aren't driven by profit, but rather “involve incentives designed to improve the quality and efficiency of care, and consequently, address its costs.”

Michael Rock, senior associate director of legislative affairs for the AHA, said it's unclear whether federal tax officials will revise the rules, and if so, when.

Chesley said the AHA draft guidance also appears to include private-market accountable care deals, which he said was also necessary.

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