In CCA 201607026, the IRS Office of Chief Counsel has concluded that the income that an Accountable Care Organization (ACO) will receive from the Medicare Shared Savings Program (MSSP) is not fixed or determinable at the end of the tax year in which the services are provided.

Background

The Affordable Care Act (ACA) directed the Department of Health and Human Services (HHS) to establish the MSSP to promote accountability for care of Medicare beneficiaries, improve the coordination of Medicare fee-for-service items and services, and encourage investment in infrastructure and redesigned care processes for high quality and efficient service delivery. Groups of health care service providers and suppliers that have established a mechanism for shared governance and that meet certain criteria specified by HHS are eligible to participate as ACOs under the program.

In November 2011, the Centers for Medicare & Medicaid Services (CMS), the agency within HHS that administers the Medicare program, released final regulations addressing the MSSP. The final rules establish the new voluntary MSSP to provide incentives for participating health care providers that agree to work together and become accountable for coordinating care for patients. Providers who coordinate care through this program and meet certain quality standards may share in savings they achieve for the Medicare program.

The regulations set forth certain "programmatic factors" for ACOs, stating that the Secretary of HHS must: (1) establish an expenditure benchmark, (2) compare the benchmark to the assigned beneficiary per capita Medicare expenditures in each performance year during the term of the agreement to determine the amount of any savings, (3) establish the appropriate minimum savings rate and determine the appropriate sharing rate for ACOs that have generated savings against the benchmark, and (4) determine the required sharing cap on the total amount of shared savings that may be paid to an ACO.

Chief counsel's advice

The IRS Chief Counsel's Office (IRS) analyzed a claim by a taxpayer operating as an ACO that the amount of the MSSP payments that it will receive is contingent on factors that are not determinable at the end of the tax year. The IRS noted that, under Reg. Section 1.446-1(c)(ii), accrual-method taxpayers recognize income "when all the events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy." The IRS agreed that, due to the MSSP programmatic factors, not all events fixing the Taxpayer's right to receive the income will have occurred during the performance year, and the amount to be received is not determinable with reasonable accuracy at the end of the year.

To be eligible to receive MSSP payments, the IRS explained, an ACO must meet quality performance standards established by HHS/CMS and demonstrate that it has achieved savings against an appropriate benchmark of expected average per capita expenditures. Because of the timeline of the application of the programmatic factors, the taxpayer will be unable to determine at the end of the tax year if it has achieved the necessary savings to participate in the MSSP. For instance, the IRS noted that the beneficiaries used to determine an ACO's performance are assigned retroactively, and the performance benchmark is not determined until six months after the performance year ends. For the same reasons, in addition to the right to receive the income not being fixed at the end of the tax year, the IRS determined that the amount the taxpayer can expect to receive from the MSSP cannot be determined with reasonable certainty at the end of the tax year.

Implications

This Chief Counsel Memorandum clarifies when accrual-method taxpayers should include MSSP payments in gross income. ACO providers receive Medicare shared savings payments if the ACO meets quality performance standards as determined by HHS. This determination is based on a calculation that considers performance data of certain Medicare beneficiary treatment during the tax year. The performance benchmark is not, however, determined until approximately six months after the performance year ends. Prior to this time, the taxpayer will not know if the goal has been reached or whether there is any Medicare savings to be distributed.

Accrual-method taxpayers include payments as gross income when they have a fixed right to receive the income and the amount can be determined with reasonable accuracy. There is a fixed right to receive the income when any material contingencies on the taxpayer's eventual receipt of income are removed. The amount can be determined with reasonable accuracy when a reasonable basis for calculation exists. With this memorandum, the IRS has determined that these criteria cannot be recognized within the tax year. Receipt of any payment and payment calculation are both contingent upon determinations that occur after the close of the tax year. Accrual taxpayers should not, at this time, include MSSP payments in gross income in the year the services are provided.

MSSP payments should be distinguished from traditional fee-for-service Medicare payments during the course of the year. Organizations should continue to account for these payments separate from MSSP payments. Further, fiscal-year tax filers should be aware of when HHS determines the MSSP performance benchmark so the payments are included in the correct filing year.

Please contact your EY professional for further information.

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