Healthcare networks do not fit the definition of a third party settlement organization.
The legal reasoning behind this conclusion is based on the specific characteristics and requirements outlined in the Internal Revenue Code and Treasury Regulations for an entity to be considered a third party settlement organization. According to Subsection 6050W(b)(1)(B) and Subsection 1.6050W-1(c)(2), a third party settlement organization is defined as the central organization that has the contractual obligation to make payments to participating payees of third party network transactions. This organization must operate a third party payment network that enables purchasers to transfer funds to providers of goods and services.
Healthcare networks, however, do not operate in this manner. As detailed in Subsection 1.6050W-1(e)(example_17) and reiterated in the IRS FAQ and Fact Sheet, healthcare networks collect premiums from covered persons and then pay healthcare providers pursuant to provider agreements. These payments are not direct transfers of funds from purchasers to providers of goods and services but are instead compensations for services rendered under predetermined rates. This structure does not meet the criteria of a third party payment network, which requires the facilitation of direct fund transfers between purchasers and providers.
Additionally, the IRS Private Letter Ruling (PLR 201201001) further clarifies that entities like pharmacy benefit management businesses, which operate similarly to healthcare networks, are not considered third party settlement organizations because they do not enable direct fund transfers from plan participants to pharmacies.
Therefore, based on the definitions and examples provided in the relevant sections of the Internal Revenue Code, Treasury Regulations, and IRS guidance, healthcare networks do not fit the definition of a third party settlement organization.
Sources:
§ 1.6050W-1. Information reporting for payments made in settlement of payment card and third party network transactions.
FS-2023-6
Publication 1220 (9/2023)
PLR 201201001
§ 6050W. Returns relating to payments made in settlement of payment card and third party network transactions
