Does A Tax-Exempt Healthcare Organization’s Participation in an Accountable Care Organization (ACO) Adversely Affect Its Tax-Exempt Financing? IRS Notice 2014-67 Provides Guidance.


The Patient Protection and Affordable Care Act authorizes the Department of Health and Human Services (“HHS”) to establish a Medicare Shared Savings Program (“Shared Savings Program”) to promote accountability for care of Medicare beneficiaries, to improve the coordination of Medicare fee-for-service items, and to promote efficiency in the delivery of services. Under the Shared Savings Program, groups of health care providers and suppliers that establish a mechanism for shared governance and meet criteria established by HHS can participate in “accountable care organizations” or “ACOs.” ACOs may become eligible to participate in Shared Savings Programs under which they can share in the economic benefits of increased efficiency in the delivery of services. Since ACOs frequently include for-profit healthcare providers, tax-exempt healthcare organizations initially were faced with the question whether their participation in an ACO with non-exempt entities would raise private inurement or excess private benefit concerns. The IRS, in Notice 2011-20, provided assurance that a tax-exempt healthcare organization’s participation in an ACO would not result in private inurement or an impermissible private benefit to the non-exempt participants in the ACO, provided that the requirements stated in the notice were met.  Although Notice 2011-20 provided comfort as to private inurement and excess private benefit concerns, tax-exempt healthcare organizations which used tax-exempt bonds to finance their facilities worried that their participation in an ACO might constitute a “private business use” of their facilities. If participating in an ACO were to constitute a “private business use” of facilities funded with tax-exempt bonds, the organization’s tax-exempt financing might be adversely affected.

Guidance for Participation In An ACO:

In Notice 2014-67, the IRS expanded on Notice 2011-20 by providing additional guidance for tax-exempt healthcare organizations that have financed their facilities using tax-exempt financing. Notice 2014-67 provides that participation in an ACO by a tax-exempt healthcare organization will not give rise to private business use of bond-financed facilities if the following factors are met:

  • Terms of participation in the Shared Savings Program by the tax-exempt healthcare organization through the ACO (including its share of payments or losses under the Shared Savings Program) are set forth in advance in a written agreement negotiated at arm’s length;
  • CMS has accepted the ACO into the Shared Savings Program, and has not terminated the ACO’s participation;
  • The share of economic benefits of the tax-exempt healthcare organization (including its share of payments under the Shared Savings Program) is proportional to the benefits or contributions the tax-exempt healthcare organization makes to the ACO.  If the tax-exempt healthcare organization has an ownership interest in the ACO, the ownership interest is proportional and equal in value to the capital contributions to the ACO, and returns of capital, allocations and distributions from the ACO are made in proportion to ownership interests;
  • The tax-exempt healthcare organization’s share of ACO losses (including its share of Shared Savings Program losses) does not exceed the share of ACO economic benefits to which the tax-exempt healthcare organization is entitled;
  • All contracts and transactions entered into by the tax-exempt healthcare organization with the ACO and the other participants in the ACO, and by the ACO with the ACO’s participants, are at fair market value; and
  • The tax-exempt healthcare organization does not transfer or otherwise contribute the property financed with tax-exempt bonds to the ACO (unless the ACO is itself a governmental person or, for qualified 501(c)(3) bonds, a 501(c)(3) organization or a governmental person).

In a bow to consistent treatment, the first 5 factors in Notice 2014-67 are the same as those in Notice 2011-20. Thus, for the most part, the factors relevant to a private inurement and excess private benefit analysis of a tax-exempt organization’s participation in an ACO are also relevant to determining whether there is a private business use of facilities financed with tax-exempt bonds.

Management Contracts With Bonuses For Meeting Shared Savings Program Standards:

Notice 2014-67 also provides guidance concerning the terms of  management agreements that a tax-exempt healthcare organization may enter into with respect to facilities that are financed using tax-exempt bonds. Under Rev. Proc. 97-13, a management contract which compensates the manager on the basis of net profits from the facility provides for an impermissible private business use. Rev. Proc. 97-13 provides specific safe harbors for management contracts to avoid impermissible private business use. Notice 2014-67 expands Rev. Proc. 97-13 by providing a specific safe harbor for management contracts which include productivity awards determined by achievement of quality performance standards under a Shared Savings Program. To come within the safe harbor, the amount of the productivity award must be stated as a fixed dollar amount, a periodic fixed fee, or a tiered system of stated dollar amounts or periodic fixed fees based solely on the level of performance achieved.

Increased Flexibility In Term of Multi-Year Management Contracts:

Notice 2014-67 also adds flexibility to permissible multi-year management agreements by extending safe harbors and permitting five-year management contracts which are not terminable by the tax-exempt healthcare organization prior to the end of the term (prior guidance required that a 5 year management contract be terminable by the tax-exempt entity after 3 years).


Guidance regarding participation of tax-exempt healthcare organizations in ACOs is applicable to tax-exempt bonds issued after January 22, 2015. Guidance as to management contracts is applicable to contracts entered into, materially modified or extended on or after January 22, 2015.

Public Comment Period:

The Treasury is soliciting public comment on the guidance provided by Notice 2014-67 and on any further guidance needed to facilitate participation un the Shared Savings Program by tax-exempt healthcare organizations. Public comments may be submitted on or before January 22, 2015.