After a three-year review of a proposal to establish a second not-for-profit medical foundation, the Internal Revenue Service has awarded tax-exempt status to the Burbank, Calif.-based UniHealth America foundation so it may acquire Long Beach, Calif.-based Harriman-Jones Medical Group.
According to a copy of the confidential Feb. 3 determination letter, obtained last week by MODERN HEALTHCARE, the IRS has ruled that the not-for-profit UniHealth system may form the Harriman-Jones Medical Foundation, which will acquire the assets of the existing for-profit Harriman-Jones medical group, a 70-physician multispecialty practice.
The new foundation will acquire the medical group for $19.1 million, according to the eight-page IRS letter.
Although the favorable ruling was long-awaited, it's the fourth such determination by the IRS regarding the development of integrated healthcare de-livery systems by hospital organizations and physician groups.
Ross Goldberg, a UniHealth spokesman, said UniHealth had been anticipating approval of the proposal, submitted in 1991, because the IRS last year gave its nod for UniHealth's plan to have a subsidiary acquire the assets of 78-physician Facey Medical Group, a multispecialty group in Mission Hills, Calif. (April 12, 1993, p. 16).
Industry sources said last week that the positive decision in Harriman-Jones and similar rulings on the creation of the La Habra, Calif.-based Friendly Hills HealthCare Foundation, UniHealth's plan to acquire Facey Medical Group and a similar deal by Deaconess Medical Center in Billings, Mont., are welcome news for providers organizing regional integrated systems.
Following the guidance provided in the rulings and in the recently issued IRS audit guidelines for integrated delivery systems offers the likelihood of success in pursuing tax-exempt status for such systems, said Michael Peregrine, a healthcare attorney with Gardner, Carton & Douglas in Chicago.
In determining that the Harriman-Jones Medical Foundation qualified as a tax-exempt public charity under Section 501 (c)(3), the IRS noted factors similar to those outlined in its deter mination about Facey: No more than two members of the new foundation's 10- member board will be ap pointed by the physicians, and the percentage of gross revenues to be paid to physi cians will be derived from "arm's-length" negotiations with the foundation.
Physicians also would be expected to provide $750,000 in charity care annually, treat emergency patients regardless of their ability to pay, and accept Medicare and Medicaid patients.
Under the plan submitted for IRS review in 1991, the Harriman-Jones Medical Foundation would pay cash and notes to acquire 100% of the stock in the medical group from its 23 physician shareholders. The other 47 physicians are employees of the medical group.
The foundation would lease the assets from the new physician corporation, manage the clinics and contract with the physicians. The foundation would pay the physicians a percentage of the foundation's adjusted gross income.