The Internal Revenue Service has approved the tax-exempt status of a new foundation set up by Rockford (Ill.) Memorial Hospital to acquire the 100-physician Rockford Clinic.
The favorable tax ruling is at least the fifth regarding the development of an integrated delivery system by a hospital or hospital system (Feb. 14, p. 4).
The latest ruling involved the hospital's creation of a new foundation called Rockford Memorial Health Service Corp. Under the plan reviewed by the IRS, the new foundation intends to acquire the assets of the clinic for $29.9 million and hire the clinic's physicians as employees.
The assets include two outpatient clinics, real estate, medical equipment and the clinic's HMO, called CliniCare, which has 26,000 enrollees. The assets to be acquired by the hospital don't include any intangible assets, such as remuneration for anticipated patient revenues or good will.
The hospital and clinic reached a tentative acquisition agreement in October and then sought IRS approval (Oct. 11, 1993, p. 17).
In an April 4 determination letter, the IRS said the new foundation would be considered a tax-exempt public charity for the following reasons:
The foundation, through the hospital and clinic physicians, will provide emergency care without regard to a patient's ability to pay.
The foundation will accept Medicare and Medicaid patients.
The foundation will be involved with medical education and research.
Physician representation on the foundation's 15-member board will be limited to three seats, or 20% of the total board.
The criteria that the IRS used to make its decision are consistent with those used in the previous four IRS rulings on integrated delivery systems, said Michael Peregrine, a healthcare attorney with Gardner, Carton & Douglas in Chicago. But it's noteworthy that the hospital isn't paying for any intangible assets, he said. HHS' inspector general's office repeatedly has warned against such payments, saying they may represent illegal kickbacks for patient referrals.