The Internal Revenue Service has sent a pair of powerful messages to tax-exempt hospitals engaging in dubious recruitment, retention and compensation schemes with physicians and others.
As part of a $1 million tax settlement with Houston's Hermann Hospital, the IRS last month released eight pages of physician recruiting guidelines (Oct. 24, p. 2). Typically, such deals are confidential, and the fact that this agreement was publicized surely was no coincidence.
Also last month, reporter David Burda uncovered an effort begun by agents in June to revoke the tax-exempt status of a Florida healthcare company for providing excessive compensation and perks for physicians and other insiders (Oct. 31, p. 2).
The Hermann guidelines aren't legally binding with any other institution. However, in the absence of a planned IRS memorandum on physician recruiting, the activity in Texas and Florida helps illuminate a gray area of the law.
Tax law prohibits not-for-profit entities from using their funds for the private inurement or benefit of physicians and others who have close ties to the organizations.
Hermann, which earlier fired President Harry Neer over improprieties related to the purchase of beef, offered meaty income guarantees, subsidized parking and office personnel, free office space, equipment loans, and loan guarantees to physicians. In most cases, the physicians weren't required to repay the benefits.
Meanwhile, the IRS accused the former operator of North Miami (Fla.) General Hospital of overpaying physicians for their medical practices and then selling them to physicians and other insiders in an effort to retain their loyalty and patient referrals. The hospital also allegedly gave excessive pay, perks and loans to physicians and executives.
Not-for-profit managers can understandably feel hampered in competing with deep-pocketed for-profit organizations for top-flight physicians. The level of fear has brought some recruiting to a standstill, consultants say.
Executives need to chill out. The bottom line is that physician incentives can be acceptable if they're reasonable, compensate for something tangible and respond to a demand for a service that benefits the community.
For example, lines of credit and loan guarantees at reasonable rates are OK; income guarantees for two years or less are acceptable; and rent and equipment subsidies must be at fair market value. But when executives pile on the incentives-adding income guarantees to loans and practice start-up subsidies-red flags should go up.
Completing a formal exercise to validate your hospital's arrangement can help prove its acceptability and could be beneficial if the need arises to justify it to the IRS.
Blatant schemes to steal doctors or generously reward them to gain more hospital business clearly are off limits. The operative word for executives should be "reasonable."