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The OIG Issues An OIG Rule on ACOs and the IRS Provides Additional Guidance For Tax-Exempt Organizations

On October 20, 2011, the Center for Medicare and Medicaid Services (CMS) and the Department of Health and Human Services Office of Inspector General (OIG) released an Interim Final Rule (OIG Rule) providing fraud and abuse waivers for accountable care organizations (ACOs) that participate in the Medicare Shared Savings Program (Shared Savings Program). On the same day, the Internal Revenue Service (IRS) issued guidance for charitable organizations seeking to participate in ACOs and the Shared Savings Program. Each was released in conjunction with the CMS Final Rule on ACOs and the Federal Trade Commission and Department of Justice final Statement of Antitrust Enforcement Policy Regarding ACOs Participating in the Shared Savings Program. (See B&T Antitrust/Healthcare Alert, dated Oct. 26, 2011)

The OIG Rule establishes fraud and abuse waivers for certain provisions of the federal Physician Self-Referral Law and its implementing regulations (Stark Law), the federal Anti-Kickback Statute and its implementing regulations (Anti-Kickback Statute), the federal Civil Monetary Penalty Law (CMP Law) related to prohibiting hospital payments to physicians to reduce services, and the CMP Law that relates to the prohibition of inducements to beneficiaries of federal health care programs such as Medicare and Medicaid.

The OIG Rule provides for five (5) waivers, two of which were not included in the CMS Proposed Rule on ACOs, which was issued on April 7, 2010: a waiver for ACO activity prior to Shared Savings Program participation in order to accommodate start-up arrangements; and a waiver for incentivizing patients to seek preventative care. In addition to these two new waivers, the OIG Rule includes waivers for ACO participation, ACO shared savings distributions, and a Stark Law waiver. The ACO participation waiver essentially provides that the Stark Law, Anti-Kickback Statute, and the CMP Law related to gainsharing agreements would be waived for ACOs. The ACO shared savings distribution waiver waives the Stark Law, Anti-Kickback Statute and the CMP Law related to gainsharing arrangements for distributions or shared savings earned by an ACO. The Stark Law waiver provides that the CMP Law related to gainsharing and the Anti-Kickback Statute would be waived for any financial relationship surrounding an ACO that would implicate the Stark Law.

The OIG Rule will become effective on November 2, 2011. CMS and the OIG will receive and consider comments on the OIG Rule for 60 days after the OIG Rule becomes effective.

The IRS guidance issued in the form of Notice 2011-20, and a Fact Sheet, explain how the IRS expects existing guidance to apply to tax-exempt organizations, such as non-profit hospitals, that participate in the Shared Savings Program for ACOs. The IRS made clear that generally it expects ACO participation to further the charitable purpose of charitable organizations. The IRS also stated that tax-exempt participants in an ACO need not necessarily have control over the ACO in order to ensure that its participation furthers its charitable purpose. An ACO engaged exclusively in the Shared Savings Program activities can still qualify for tax exemption under 501(c)(3). Additionally, the IRS will not consider a charitable organization’s participation in the Shared Savings Program through an ACO to result in inurement or impermissible private benefit to the private party ACO participants where:

  • The terms of the tax-exempt organization’s participation in the Shared Savings Program through the ACO are set forth in a written agreement negotiated at arm’s length;
  • CMS has accepted the ACO into and has not terminated it from the Shared Savings Program;
  • The tax-exempt organization’s share of economic benefits is proportional to the benefits or contributions that it provides the ACO. If the tax-exempt organization receives an ownership interest in the ACO, the ownership interest is proportionate to the capital contributions to the ACO and all returns of capital, allocations and distributions are made in proportion to the ownership interests;
  • The tax-exempt organization’s share of ACO losses does not exceed its share of ACO economic benefits to which it is entitled; and
  • All contracts and transactions entered into by the tax-exempt organization with the ACO, its participants and any other parties are fair market value.

The IRS noted that no single factor is fundamental to avoid inurement. Additionally, a charitable organization need not satisfy all five of the IRS recommendations in order to prevent inurement or unlawful private benefit.

Further information can be obtained by downloading the Oct. 28, 2011 Healthcare Alert “Accountable Care Organizations and Shared Savings Program Final Rule.” 



About this Author

Mark E. Rust Barnes Thornburg Law firm Chicago Corporate Finance and Healthcare Law Attorney

Mark Rust is Managing Partner of the Chicago office of Barnes & Thornburg, LLP, and Chair of the firm’s national Healthcare Department. Mr. Rust concentrates his practice in transactional, regulatory and medical-legal issues affecting healthcare entities and provider organizations. For nearly 30 years he has written about or practiced in healthcare law, writing in a wide variety of publications from theJournal of the American Bar Association to USA Today. He is listed as a notable healthcare lawyer in Chambers USA, Top Healthcare Lawyers of Illinois,Superlawyers...

Laura D. Seng, Barnes Thornburg Law Firm, South Bend, Healthcare Attorney

Laura Seng is a partner in Barnes & Thornburg LLP’s South Bend, Indiana, office and is the chair of firm's national Healthcare Department. Ms. Seng concentrates her practice in regulatory compliance, transactional matters and medical-legal business issues for healthcare entities and individual providers. She is listed as a notable healthcare lawyer by Best Lawyers in America® and was recognized by her peers in Indiana Super Lawyers® as a “Rising Star” in healthcare law.  

Ms. Seng represents hospitals, physicians, multi-specialty clinics and healthcare organizations, as well as laboratories, pharmacies and other healthcare providers. She advises clients on healthcare reform implications and regulatory issues, including the Stark law and Anti-Kickback statute, Medicare/Medicaid billing and reimbursement, fraud and abuse laws, and HIPAA compliance. Ms. Seng also conducts internal investigations for corporate compliance matters and defends clients in governmental investigations and whistleblower actions related to Medicare/Medicaid and the False Claims Act.  In addition, Ms. Seng advises hospitals, healthcare entities and individual practitioners with respect to professional service agreements, creation of strategic alliances, hospital and provider mergers and acquisitions, corporate and regulatory compliance, professional licensure actions, state and federal agency administrative actions, and general healthcare and corporate governance matters.

Heather Delgado Healthcare Attorney

Healthcare providers depend upon Heather Delgado for her commitment to responsiveness and practical legal advice. Heather focuses on finding the right solution for her clients. She is valued for her ability to overcome the obstacles her clients face and for her skill in applying complex laws and regulations to their business practices.

Heather’s experience includes the representation of healthcare providers, including hospitals, health systems, specialty hospitals, ambulatory surgery centers, multi- and single-specialty medical practices, and a wide variety of healthcare...