Tax Help: Cost Sharing Software Held Not to be Inurement to Nonprofit Hosptitals

The IRS released a directive explaining that the Service will not treat the benefits that a hospital provides to its medical staff physicians as impermissible private benefit or inurement in violation of Code Sec. 501(c)(3) if the benefit falls within the range of Health IT Items and Services allowed by the Department of Health and Human Services' EHR regulations, and the hospital operates in accordance with the conditions set forth in the IRS directive. Lois Lerner, IRS director, Exempt Organizations, indicated in May that "taxable hospitals are already doing this." She added that "tax-exempt hospitals were concerned that there may be a concern from our end with regard [to these benefits] and exemption."

Excess Benefit Transaction

An IRS official from the Exempt Organizations Technical division clarified that if the parties meet the conditions described in the Service's directive, the IRS would not consider the subsidy or cost-sharing to be an EBT that would trigger excise taxes. However, if in the course of a field examination an IRS agent finds private benefit or inurement outside the context of an EHR, the agent could look into the benefits of the health IT as well. The IRS official also clarified that an EHR arrangement would not be treated as an EBT simply because a physician utilizing the subsidy is on the hospital board or is otherwise considered to be a "disqualified person."


Shared Access

Participants in the teleconference also addressed the extent to which physicians must provide the hospital with access to their patients' electronic health records. According to the IRS, hospitals should have some level of access to patient records or an EHR arrangement that is subsidized for the benefit of participating physicians, but gives the hospital no access, could constitute an impermissible private benefit or inurement in violation of Code Sec. 501(c)(3).


Cost-Sharing

Participants also addressed cost-sharing issues raised by the IRS's directive. According to the IRS, physicians would need to pay their share of costs for EHR arrangement prior to receiving the benefit. Otherwise, this may be viewed as reimbursement for expenses and monetary remuneration. However, the IRS stipulated that the directive allows hospitals to vary the allocation of costs between the hospital and participating physicians. The directive mandates that at a minimum, 15 percent of the costs be paid by physicians, but permits for different allocations among different groups of physicians.


Possible Limitations

According to Moroney, a hospital could limit the subsidy to a certain level of physicians, such as "active" medical staff. Marilyn Lamar, an attorney with Liss & Lamar in Oak Brook, Ill., noted that a hospital could provide the subsidy to a group practice that includes some physicians not on the hospital's medical staff without running afoul of the IRS's directive and the HHS's regulations. Lamar also indicated that it may also be possible to provide the EHR subsidy to physicians not on the hospital's medical staff as long as the community rationale is followed.





IRS EO Directive: Hospitals Providing Financial Assistance to Staff Physicians Involving Electronic Health Records

May 15, 2007

Exempt organizations: Hospitals: Electronic health records.



Internal Revenue Service



memorandum

date: 05/11/07

to: Director, Exempt Organizations, Examinations SE:T:EO:E

Director, Exempt Organizations, Rulings & Agreements SE:T:EO:RA


From: Director, Exempt Organizations SE:T:EO

/s/ Lois G. Lerner


subject: Hospitals Providing Financial Assistance to Staff Physicians Involving Electronic Health Records

The purpose of this memorandum is to provide a directive for handling examination and exemption application cases involving hospitals that provide physicians who have staff privileges at those hospitals ("medical staff physicians") with financial assistance to acquire and implement software that is used predominantly for creating, maintaining, transmitting, or receiving electronic health records ("EHRs") for their patients.

Many hospitals described in section 501(c)(3) of the Internal Revenue Code ("Code") plan to establish interoperable EHR systems to improve the effectiveness and efficiency of their medical care and to reduce medical errors. Some hospitals believe that their medical staff physicians need a financial incentive to acquire and implement EHR software that would allow the physicians to connect to the hospitals' EHR systems. On August 8, 2006, the U.S. Department of Health and Human Services ("HHS") issued final regulations (see 42 C.F.R. Section 411.357 and 42 C.F.R. Section 1001.952) ("HHS EHR Regulations") that allow hospitals to provide, within specific parameters, EHR software and technical support services ("Health IT Items and Services") to their medical staff physicians without violating the federal anti-kickback law, 42 USC §1320a-7b and physician self-referral law, 42 USC §1395nn.

We will not treat the benefits a hospital provides to its medical staff physicians as impermissible private benefit or inurement in violation of section 501(c)(3) of the Code if the benefits fall within the range of Health IT Items and Services that are permissible under the HHS EHR Regulations and the hospital operates in the manner described below.

A hospital that is otherwise described in section 501(c)(3) of the Code enters into Health IT Subsidy agreements with its medical staff physicians for the provision of Health IT Items and Services at a discount ("Health IT Subsidy Arrangements"). These Health IT Subsidy Arrangements require both the hospital and the participating physicians to comply with the HHS EHR Regulations on a continuing basis. The Health IT Subsidy Arrangements provide that, to the extent permitted by law, the hospital may access all of the electronic medical records created by a physician using the Health IT items and Services subsidized by the hospital. The hospital ensures that the Health IT Items and Services are available to all of its medical staff physicians. The hospital provides the same level of subsidy to all of its medical staff physicians or varies the level of subsidy by applying criteria related to meeting the heathcare needs of the community.

This memorandum does not apply to a hospital that allows its earnings to inure to the benefit of one or more medical staff physicians through arrangements that are other than Health IT Subsidy Arrangements, because the hospital would not be considered to be described in section 501(c)(3) of the Code.

If you have any questions regarding this memorandum, please contact Stephen Clark at 202-283-9474, or Steven Grodnitzky at 202-283-8941.



Q&A on Hospitals' Health IT Subsidy Arrangements with Medical Staff Physicians (as described in May 11, 2007 Field Memorandum)

June 25, 2007

Internal Revenue Service: Exempt Organizations Division Field Directive: Hospitals: Electronic health records: Questions and answers.




Q&A on Hospitals' Health IT Subsidy Arrangements with Medical Staff Physicians (as described in May 11, 2007 Field Memorandum)



Q1 --What if a hospital's Health IT Subsidy Arrangements with its medical staff physicians aren't entirely consistent with the conditions in the Memorandum? Would those arrangements result in impermissible private benefit or inurement?

A1 --Such arrangements will not be covered by the "safe harbor" described in the Memorandum. However, they will not necessarily generate impermissible private benefit or inurement, because the Memorandum is not meant to set forth the only permissible Health IT Subsidy Arrangement between hospitals and physicians. Rather, the facts and circumstances of any arrangement that does not meet the conditions described in the Memorandum will need to be reviewed to determine if it results in any impermissible private benefit or inurement.

Q2 --What is meant in the Memorandum by "financial assistance" and "subsidies" to medical staff physicians to acquire and implement electronic health records ("EHR")-related software and services that would enable the physicians to connect to the hospitals' EHR systems?

A2 - Consistent with the HHS regulations referenced in the Memorandum, "financial assistance" and "subsidy" do not include cash payments from the Hospital to the physicians. Rather, they refer to arrangements in which the hospital provides the physician with EHR-related software or information technology and training services, and the physician contributes a portion of the cost.

Q3 - What if the hospital provides a Health IT Subsidy to a "disqualified person" as defined in section 4958?

A3 - Assuming that the hospital meets all the conditions described in the Memorandum, the agent will not treat such Health IT Subsidy Arrangement as an excess benefit transaction.

Q4 --What if the agent finds inurement to a medical staff physician outside the context of the Health IT Subsidy Arrangement?

A4 --If the agent finds that the hospital's net earnings have inured to the benefit of one or more medical staff physicians outside the context of such arrangement, then the hospital would not be covered by the safe harbor set forth in the memorandum. Although the safe harbor would not apply in this situation, a determination of whether the Health IT Subsidy Arrangement results in impermissible private benefit or inurement will depend on all the facts and circumstances.

Q5 --What type of restrictions, if any, may a medical staff physician impose on the hospital's access to electronic medical records created by the physician using the Health IT Items and Services subsidized by the hospital?

A5 - A physician may deny a hospital access to such records if that access would violate federal and state privacy laws or the physician's contractual obligations to patients. Also, the hospital and physician may agree on reasonable conditions to the hospital's access. For example, their agreement could allow the hospital to access a patient's medical records only when that patient becomes a patient of the hospital, and could deny the hospital access to nonmedical information such as billing, insurance eligibility, and referral information.

Q6 --Does the hospital have to ensure that the Health IT Items and Services are available to all of its medical staff physicians at the same time?

A6 --The hospital may provide access to various groups of physicians at different times according to criteria related to meeting the health care needs of the community. The hospital should establish a plan for providing such access.