IRS Guidance Clarifies That Tax-Exempt Hospitals May Share Health Information Technology With Physicians
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.1 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.
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.