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Health Law Advisory Bulletin
IRS Guidance Clarifies That Tax-Exempt
Hospitals May Share Health Information Technology With Physicians1
By Susan
Schalla and LaVerne
Woods
[May 2007]
The Internal Revenue Service (IRS) issued
guidance on May 11, 2007 that should allow tax-exempt hospitals
to proceed with plans to share certain health information technology
(HIT) with physicians. Widespread adoption of electronic health
record (EHR) technology has become a national policy priority in
recent years, and many nonprofit hospitals qualified under Section
501(c)(3) of the Internal Revenue Code wish to provide a financial
incentive to allow physicians to acquire HIT and connect to the
hospitals’ EHR systems. Until recently, however, both federal
health law regulations and rules for tax-exempt organizations presented
hurdles. The U.S. Department of Health and Human Services (HHS)
removed the health law hurdles when it published anti-kickback safe
harbors and Stark regulatory exceptions, effective October 2006,
allowing permitted organizations to share the cost of certain HIT
and related services with referral sources. A full description of
the final HHS regulations is set forth in our August
2006 advisory bulletin.
After the HHS regulations became effective, federal
income tax questions remained for the tax-exempt hospitals, including
whether the proposed transfers could give rise to private benefit,
inurement and intermediate sanctions issues, as described in our
February
2007 advisory bulletin. The recent IRS guidance, in the form
of an internal memorandum issued by the Exempt Organizations Director,
largely removes the federal income tax obstacles to clear the way
for HIT subsidy arrangements between tax-exempt hospitals and their
medical staff physicians.
The IRS guidance states that the IRS will not treat
the benefits that a tax-exempt hospital, qualified under Section
501(c)(3), provides to its medical staff physicians as impermissible
private benefit or inurement as long as the benefits fall within
the range of HIT and related services permissible under the HHS
regulations. In addition, the hospital’s arrangement to provide
HIT and related services to physicians at a discount must meet certain
criteria:
- The HIT subsidy arrangement must require both the hospital and
the participating physicians to comply with the HHS regulations
on a continuing basis.
- The arrangement must provide that, to the extent permitted by
law, the hospital may access all of the electronic medical records
that the physician creates using the HIT and related services
subsidized by the hospital.
- The hospital must ensure that the HIT and related services are
available to all of its medical staff physicians.
- The hospital must provide the same level of subsidy to all of
its medical staff physicians, or otherwise vary the level of subsidy
by applying criteria related to meeting the healthcare needs of
the community.
Remaining Issue: Taxable Income to the Physician-Recipient?
The IRS guidance does not address the issue of whether
the hospital's subsidy to the physicians, under conditions consistent
with the HHS regulations, will constitute taxable income to the
physician-recipient. It is unclear when or if the IRS will issue
further guidance addressing this issue. If the value provided by
the hospital constitutes taxable income to the physician, it could
impede the dissemination of EHR technology, despite the resolution
of other health and tax law issues.
Footnote
1
This advisory was not intended or written
to be used, and it cannot be used, for the purpose of avoiding penalties
that may be imposed under federal tax law. Under these rules, a
taxpayer may rely on professional advice to avoid federal tax penalties
only if that advice is reflected in a comprehensive tax opinion
that conforms to stringent requirements under federal law.
For more information, please contact:
This advisory is
a publication of the Health Law and Tax-Exempt Organizations Groups
of Davis Wright Tremaine LLP. Our
purpose in publishing this advisory is to inform our clients and
friends of recent legal developments. It is not intended, nor should
it be used, as a substitute for specific legal advice as legal counsel
may only be given in response to inquiries regarding particular
situations. Attorney Advertising. Prior results do not guarantee
a similar outcome. Thank you.
Copyright 2007, Davis Wright Tremaine LLP.
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