If a not-for-profit hospital creates a physician-hospital organization simply as a vehicle to share revenues with key physicians, the hospital is putting its tax-exempt status at risk, according to the Internal Revenue Service.
The IRS issued the warning in a 38-page article published in the agency's annual continuing professional education manual. The textbook, called the CPE, is a training manual for IRS auditors.
The material in the CPE doesn't hold any value as legal precedent, but it discloses the agency's current thinking on key tax policy and enforcement issues.
One article in the CPE discusses the tax implications of new delivery systems being formed by hospitals and physicians, including PHOs and MSOs, or medical service organizations. PHOs are designed to jointly market hospital and physician services to payers. MSOs are entities through which hospitals acquire and manage physician practices.
In its report, the IRS says PHOs aren't healthcare providers that practice medicine or operate hospitals. Hence, PHOs operate for the private benefit of their participating physicians and, therefore, don't qualify as tax-exempt public charities under Section 501(c)(3) of the federal tax code, according to the IRS.
Participation in a PHO by a not-for-profit hospital doesn't change that fact, the IRS said, because any benefit derived by the hospital is secondary to the benefit derived by the physicians.
In fact, participation in a PHO can jeopardize a hospital's tax-exemption if the PHO is simply a vehicle to share revenues with loyal physicians, the IRS says.
Under the tax code, the earnings of a tax-exempt organization can't "inure" to the benefit of private individuals.
In a separate article in the CPE, the IRS issued a warning to hospitals that are dissolving physician joint ventures because of new federal prohibitions against self-referral arrangements.
The IRS says above-market or excessive payments to physicians to compensate them for the dissolution of a joint venture could violate the prohibition on private inurement and jeopardize the hospital's tax status.