The Internal Revenue Service late last month granted tax-exempt status to a Billings, Mont., not-for-profit hospital and a for-profit physician group practice that merged into a not-for-profit integrated delivery system.
It's the third tax ruling on integrated delivery systems and the first since the IRS issued a textbook for its agents in September 1993 that set out criteria for issuing tax exemptions.
The hospital and clinic followed the published IRS criteria closely, and the speed at which the tax exemption was granted is evidence that "the guidelines are a true road map to what the IRS is allowing," said Gerald Peters, the attorney who represented the hospital and clinic before the IRS.
Deaconess Medical Center and the Billings Clinic formally merged on July 1 as equal partners under the control of a parent foundation. The foundation purchased the 100-member physician group practice, and the physicians became salaried employees, said Joanne Dodd, a Deaconess spokeswoman.
The organization then applied for tax-exempt status. The key tax issue facing such integrated delivery systems is whether the amount paid to physicians for their practices violates the private inurement prohibition of the tax code, which says the earnings of a tax-exempt organization can't "inure" to the benefit of private individuals.
By meeting key criteria in the new guidelines, the merged organization got what it wanted from the IRS. The key criteria met include:
|Limiting the governing board to no more than 20% physician representation.
|Demonstrating community benefit by keeping an open medical staff, ensuring that Medicare and Medicaid patients will be seen, and maintaining an open emergency department and a policy of caring for indigent patients.
|Getting an independent appraisal of the physician practice's fair market value and using it as the basis for paying the physician practice's 65 partners for the practice assets.
The hospital declined to give the purchase price.-John Morrissey