Hermann Hospital in Houston could have lost its tax exemption for physician recruitment violations, but the Internal Revenue Service went easy on the 618-bed hospital because it turned itself in, say two top IRS officials.
With those words, the officials hope to coax other hospitals with similar problems to raise their hands. Whether hospitals take the bait remains to be seen.
After the IRS called into question the legality of certain types of hospital-physician joint ventures in November 1991, it created a short-term amnesty program for hospitals that wanted to turn themselves in. But only about a dozen hospitals did so, said T.J. Sullivan, special assistant for healthcare in the IRS' office of the assistant commissioner.
Mr. Sullivan and Marcus Owens, the director of the IRS' exempt organizations technical division, spoke with MODERN HEALTHCARE last week about the groundbreaking tax settlement between Hermann Hospital and the IRS.
The settlement, known as a closing agreement, requires Hermann to pay a $1 million fine in exchange for maintaining its status as a 501(c)(3) organization under the federal tax code.
The settlement resolves allega-tions that the not-for-profit hospital violated the conditions of its tax exemption by recruiting and retaining physicians with suspect financial inducements, such as free loans (Oct. 24, p. 2).
Under the federal tax code, the earnings of a tax-exempt organization can't inure to the benefit of private individuals. Inurement violations can result in the revocation of an organization's tax status, which is happening right now with the former operator of a Florida hospital (See story, p. 2).
Many healthcare tax observers have speculated that the IRS used the closing agreement, which traditionally is confidential, to disseminate guidelines on physician recruitment and retention that others might be wise to follow.
The IRS required Hermann Hospital to publicly release the agreement, which contained a 27-part set of guidelines.
Messrs. Owens and Sullivan downplayed the guidance aspect of the agreement and instead warned hospitals not to rely on the guidelines to keep them out of trouble.
"It's important to stress that this is an agreement with one organization," Mr. Owens said. Like a private-letter ruling from the IRS, the agreement has no precedential value legally, he said.
Mr. Sullivan said the public disclosure requirement was placed on Hermann primarily to punish the hospital, not to help other hospitals.
"Many times, adverse publicity is worse than a fine," Mr. Sullivan said.
And Messrs. Sullivan and Owens said that although the IRS views the hospital's infractions as "fairly egregious," Hermann Hospital didn't lose its exemption or pay a higher fine because it turned itself in.
They suggested that other hospitals that do the same might get off easier than if the IRS uncovered inurement and private-benefit problems.
For instance, the revocation proceedings against the former Florida hospital operator were the result of a review that was conducted as part of the IRS' 4-year-old systematic audit program of tax-exempt organizations, including many hospitals and hospital systems.
To date, 79 organizations have been selected for audits. About a dozen have been completed, including audits of eight hospitals, Mr. Sullivan said.