IRS proposed "physician recruitment" revenue ruling offers few kernels in search for.
(*) A revenue ruling is an official interpretations by the IRS of the internal revenue laws, statues, and regulations and sets forth the conclusions of the IRS on how tax is applied to an entire set of facts. Revenue rulings are published to provide precedents to be used in the disposition of other cases and may be cited and relied on for that purpose.
In March, the IRS issued Announcement 95-25, which contained proposed revenue ruling regarding the impact of certain physician recruitment incentives on the tax-exempt status of hospitals that recruited physicians for their nonemployee medical staffs or to provide services on behalf of the hospitals. The proposed ruling is helpful to understand whether a recruitment initiative will cause a hospital that is exempt from taxation pursuant to section 501(c)(3) of the Internal Revenue Code to violate the organizational and operational requirements necessary for continued tax exemption. In this regard, the IRS stated that whether a hospital provides incentives in a manner that does not cause it to violate these tests is based on relevant facts and circumstances. The IRS will determine that a hospital violates the tax-exempt prohibitions where the evidence suggests that a particular recruitment activity results in any of the following: * Does not further the hospital's tax-exempt purposes or bear a reasonable relationship to the accomplishment of those purposes. * Results in private inurement (i.e., the recruitment activity is merely a device to distribute net earnings of the hospital to the physicians). * Causes the hospital to be operated for the benefit of private interests so as to have a substantial nonexempt purpose. * Is in violation of criminal prohibitions (such as violations of the Medicare and Medicaid antikickback statute).
Based on these restrictions, as well as on the current controversy regarding permissible recruitment activities following IRS release of the Hermann Hospital closing agreement, it is clear that the issue of the permissible bounds of physician recruitment incentives have great significance. The ability of a hospital to survive and serve its community will be directly related to its ability to recruit physicians in compliance with established IRS standards.
Five Situations and Their Obvious Conclusions
Announcement 95-25 provides guidance to hospitals and physicians through its analysis of five situations involving physician recruitment activities by tax-exempt hospitals. Each situation addresses the issue of whether proposed recruitment incentives will result in a violation of requirements for a hospital's tax-exempt status. At issue is whether the hospital, under a certain set of facts, may use a particular recruitment incentive to recruit private practice physicians to join its nonemployee medical staff or to provide services on behalf of the hospital.
Facts: Hospital A is located in a rural area and is the only hospital within a 100-mile radius. The hospital's county has been designated as a Health Professional Shortage Area for primary medical care professionals (including OB/GYNs) by the U.S. Public Health Service. The physician recruit recently completed an OB/GYN residency and is not currently a member of the hospital's medical staff. Hospital A recruits the physician to establish and maintain a full-time private OB/GYN practice in its service area and to become a nonemployee member of its medical staff. The hospital's recruitment package to the physician includes a one-time bonus of $5,000, payment of the physician's malpractice premiums for one year, office space in a building owned by the hospital for three years at below market rental rates, a guarantee of the mortgage on the physician's residence, and provision of an unspecified amount of the physician's private practice start-up expenses. A written recruitment agreement was entered into pursuant to arm's-length negotiations between the parties.
Conclusion: The IRS concluded that Hospital A did not jeopardize its tax-exempt status in this recruitment effort because objective evidence (the U.S. Public Health Service Health Professional Shortage Area report) demonstrated a need for OB/GYNs in the community served by the hospital, and the incentives paid to the physician recruit were reasonably related to causing the physician to establish and maintain a full-time private practice in the community.
Facts: Hospital B is located in an economically depressed inner city. The hospital conducted a community needs assessment that indicated there was a shortage of pediatricians in its service area and that Medicaid patients were having difficulty obtaining the services of pediatricians. The physician recruit is a pediatrician who currently practices outside of Hospital B's service area and is not on the hospital's medical staff. The hospital recruits the physician to relocate to the city, establish and maintain a full-time pediatric practice in the community, become a nonemployee member of its medical staff, and treat a reasonable number of Medicaid patients. Hospital B's recruitment package includes reimbursement for moving expenses (to the extent allowed by the Internal Revenue Code), reimbursement for professional liability tail coverage for the physician's former practice, and a three-year private practice income guarantee that falls within the range reflected in regional and national surveys regarding the income earned by physicians in the same specialty. A written agreement was entered into pursuant to arm's-length negotiations between the parties.
Conclusion: The IRS concluded that Hospital B did not jeopardize its tax-exempt status in this recruitment effort because objective evidence (the needs assessment) demonstrated a need for pediatricians in the community served by Hospital B, and the incentives paid to the physician recruit were reasonably related to causing the physician to establish and maintain a full-time practice in the community.
Facts: Hospital C is located in an economically depressed inner city. It conducted a community needs assessment that indicated that indigent patients were having difficulty getting access to care because of a shortage of obstetricians willing to treat Medicaid and charity care patients. The hospital recruits an obstetrician currently on its medical staff to provide these services. Pursuant to a written agreement between the parties, the hospital agrees to reimburse the physician for the cost of one year's malpractice insurance in return for an agreement by the physician to treat a reasonable number of Medicaid patients for that year.
Conclusion: The IRS concluded that Hospital C did not jeopardize its tax-exempt status in this recruitment effort because objective evidence (the needs assessment) demonstrated a need for obstetricians willing to treat Medicaid patients, the agreement to treat a reasonable number of Medicaid and charity care patients is reasonably related to accomplishment of the hospital's tax-exempt purposes, and any private benefit to the physician in the payment of the premiums is outweighed by the public purposes served by the agreement.
Facts: Hospital D, which is located in a medium to large size metropolitan area, operates a neonatal intensive care unit that requires a minimum of four perinatologists for adequate coverage and high-quality care. Two of the four perinatologists are relocating to other areas. The hospital, as a result of a search, determines that one of the two top replacement candidates is a physician who currently practices in the same city as Hospital D but who is a member of the medical staff of another hospital (Hospital E). Hospital D recruits the physician to be a member of its medical staff and offers a three-year private practice income guarantee as a recruitment incentive. The private practice income guarantee falls within the range reflected in regional and national surveys regarding income earned by physicians in the same specialty. A written recruitment agreement was entered into pursuant to arm's-length negotiations between the parties.
Conclusion: The IRS concluded that Hospital D did not jeopardize its tax-exempt status in this recruitment effort because objective evidence demonstrated a need for four perinatologists to provide coverage for the hospital's neonatal intensive care unit so that the hospital could promote the health of the community it serves, the provision of a reasonable private practice income guarantee as a recruitment incentive that is conditioned on the physician's obtaining medical staff privileges and providing coverage for the neonatal care unit is reasonably related to accomplishment of the charitable purposes of the hospital, and the community benefit provided by recruitment of the perinatologist outweighed any private benefit to the physician.
Facts: Hospital F is located in a medium to large size metropolitan area. It was found guilty in a court of law of knowingly and willfully violating the Medicare and Medicaid antikickback statute by providing recruitment incentives that constituted payments for recruitment. The activities resulting in the violations were "substantial."
Conclusions: The IRS concluded that Hospital F did not qualify as a tax-exempt hospital because it engaged in physician recruitment practices that resulted in a criminal conviction and the recruitment activities could not be considered isolated or inadvertent violations of the applicable statutes.
A Few Kernels: The Common Factors
The fact that these situations almost dictate the IRS conclusions has raised criticism from some commentators. One may nonetheless discern a few kernels of wisdom in the situations from which to develop a sound physician recruitment program. Based on the summaries, it would appear that the following recruitment devices met with IRS approval: * Written Agreements: All of the permissible recruitment incentives were contained in agreements that were the result of arm's-length negotiations between physicians and hospitals. The proposed revenue ruling emphasizes the need for written documentation regarding physician recruitment activities. * Board of Director Approval: All of the permissible recruitment incentives were contained in agreements that were approved by hospital boards of directors. * Community Benefit Needs: In each of the four approved situations, the hospital was able to document the community benefit served by a particular recruitment activity. For example, in two of the situations, the hospitals were able to document that they were promoting health in their communities by demonstrating the lack of physicians in a number of specialties and the inability to attract such physicians to practice in their communities. Further, the proposed revenue ruling reinforces the long-held position that tax-exempt hospitals have a charitable obligation to provide care, regardless of an individual's ability to pay. Specifically, several of the situations supported a particular recruitment effort based on the hospital's need to serve indigent and Medicaid patients who were having difficulty in obtaining adequate health care. * Income Guarantees: When approved by the IRS as a permissible recruitment incentive, private practice income guarantees fell within the range reflected in regional and national surveys regarding income earned by physicians in the same specialty. Further, the practice income guarantees were for a defined period in both situations the IRS approved. * Insurance Premiums: The IRS approved of reimbursement for malpractice and tail insurance premium costs for limited periods of duration (although the amount of insurance purchased on behalf of the physicians is unknown. * Certain Business/Personal Expenses: Moving, office, home acquisition, and practice start-up expense subsidies were approved in certain circumstances.
These common factors have been extracted in order to provide some guidance for hospitals and physicians in their employment dealings with each other. However, the proposed revenue ruling may raise more questions regarding limitations on permissible recruitment tools that the IRS identified. For example, if it is permissible to pay compensation in the form of malpractice insurance to a physician in exchange for that physician's agreement to serve Medicaid and indigent patients (situation 3), how would the IRS view other forms of compensation? Is the payment of an income guarantee to a physician currently in a hospital's service area only permissible when such payment is made to a specialist (situation 4)? Can primary care physicians only expect income guarantees in exchange for moving to areas where few would care to practice (situation 2)? Is it possible to recruit a primary care physician currently in a hospital's community and use innovative recruitment tools?
As the first IRS release of significant guidance in a number of years, Announcement 95-25 fails to offer new information. Ideally, the final version of the ruling will offer helpful guidance to hospitals in their recruitment activities. Any subsequent IRS revisions should include analyses of more realistic scenarios in order to be helpful.
Cynthia Reaves is an attorney in the Washington, D.C., offices of Epstein Becker & Green.
|Printer friendly Cite/link Email Feedback|
|Author:||Reaves, Cynthia F.|
|Date:||Jul 1, 1995|
|Previous Article:||Communication skills: a prerequisite for leadership.|
|Next Article:||Primary care: the driver in health care reform.|