Can an Accountable Care Organization (ACO) exclude the Medicare Shared Savings Program payments it receives from CMS from its Texas franchise (margin) tax total revenue?

Plain-English summary

An Accountable Care Organization (ACO) — a group of doctors, hospitals, and other providers who coordinate Medicare patient care to improve quality and reduce costs — participates in the federal Medicare Shared Savings Program (MSSP). Under the MSSP, an approved ACO receives payments directly from the Centers for Medicare & Medicaid Services (CMS) and then distributes those payments to its member providers under their agreed-upon arrangement. The ACO asked whether it can exclude these CMS payments from its Texas franchise tax total revenue.

The Comptroller ruled yes. Texas franchise tax lets a health care provider exclude, from its total revenue, payments it receives under Medicare and certain other specified government health care programs. Because the ACO is a taxable entity that participates in Medicare as a provider of health care services (the statutory definition of "health care provider" for this purpose), and the MSSP is a Medicare program, the ACO's CMS payments qualify for the exclusion — the analysis here was short because the ACO's facts fit squarely within the statute's plain terms.

What this means for you

Accountable Care Organizations and other Medicare-program intermediaries

If your organization receives payments directly from CMS under Medicare (including the Medicare Shared Savings Program) and then distributes them to member providers, this ruling supports excluding those CMS payments from your Texas franchise tax total revenue — reducing your tax base, since total revenue is the starting point for the margin calculation.

Other health care providers checking eligibility for the Medicare exclusion

The key qualifying facts here were straightforward: (1) the entity is a "health care provider" under Section 171.1011(p)(3), meaning it participates in Medicare (or another specified program) as a provider of health care services, and (2) the payments in question actually come from that program. If your organization meets both, the same statutory exclusion should apply regardless of exactly how the payments flow through to individual providers.

Accountants and tax professionals

This is a short, fact-driven ruling with minimal legal complexity — useful mainly as confirmation that MSSP payments specifically (not just traditional fee-for-service Medicare payments) qualify as "payments received under the Medicare... program" for purposes of the Section 171.1011(n)(1)(A) exclusion.

Common questions

Q: Does the exclusion apply only to traditional fee-for-service Medicare payments, or also to newer payment models like the Medicare Shared Savings Program?
A: This ruling confirms MSSP shared-savings payments qualify too — the exclusion isn't limited to traditional fee-for-service Medicare reimbursement.

Q: Does it matter that the ACO passes the CMS payments on to its member providers rather than keeping them?
A: No — the ruling doesn't condition the exclusion on the ACO retaining the funds; it focuses on whether the ACO is a health care provider receiving payments under a qualifying Medicare program.

Q: Can any organization that touches Medicare funds claim this exclusion?
A: Only entities that meet the statutory "health care provider" definition (participating in Medicare or a specified program as a provider of health care services) for the specific payments in question — and even then, this private letter ruling binds the Comptroller only for the taxpayer and facts described in the request.

Citations and references

Statutes:

• Tex. Tax Code § 171.1011(n)(1)(A) (Determination of Total Revenue from Entire Business — exclusion for Medicare and specified program payments)
• Tex. Tax Code § 171.1011(p)(3) (definition of "health care provider")

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MAR
• Opinion: https://star.comptroller.texas.gov/view/201812004L

Original ruling text

December 13, 2018

RE: Private Letter Ruling No. PLR20181001143050

**, Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your request dated Sept. 13, 2018, and your supplemental submission dated Oct. 15, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the exclusion from total revenue for payments a health care provider receives under the Medicare program.

Facts Presented

The relevant facts are based on the information contained in your private letter ruling request and supplemental submission.

** (Taxpayer) is an Accountable Care Organization (ACO). An ACO is an organization of doctors, hospitals, and other health care providers that voluntarily come together to better coordinate care for Medicare patients. The goal of coordinated care is to ensure that patients get the right care at the right time, while avoiding unnecessary duplication of services and preventing medical errors. When an ACO succeeds both in delivering high-quality care and spending health care dollars more wisely, the ACO will share in the savings it achieves for the Medicare program.

An ACO applies with the Center of Medicare & Medicaid Services (CMS) to participate in the Medicare Shared Savings Program (MSSP). An approved ACO participating in the MSSP receives Medicare payments from CMS and then transfers the payments to its members based on the agreed upon terms between the ACO and its members.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: May an ACO exclude from total revenue, under Section 171.1011(n)(1)(A) (Determination of Total Revenue from Entire Business), payments received from the CMS under the MSSP?

Ruling: Taxpayer may exclude from total revenue, to the extent included, payments received from CMS under the MSSP.

Analysis:

A taxable entity that is a health care provider may exclude from its total revenue, to the extent included, the total amount of payments the health care provider received under the Medicare (and other specified) program(s). Section 171.1011(n)(1)(A). A health care provider is a taxable entity that participates in the Medicare and other specified programs as a provider of health care services. Section 171.1011(p)(3).

Taxpayer receives payments under the MSSP, a Medicare program, for the health care services it provides. Therefore, Taxpayer may exclude such payments from total revenue to the extent they are included.

The Texas Tax Code and Texas Administrative Code are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. PLR20181001143050.

Sincerely,

Tax Policy Division – Direct Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.