A confidential Internal Revenue Service ruling on physician-hospital organizations has become a hot negotiating tool for hospitals that want favorable terms from physicians and for doctors who want to fend off one-sided deals offered by hospitals.
The ruling, disclosed in October by MODERN HEALTHCARE, cleared a not-for-profit hospital of any tax problems resulting from its participation in a PHO with most of the physicians on its medical staff (Oct. 24, p. 3).
It's believed to be the first IRS ruling on the tax implications of a not-for-profit hospital's participation in a PHO.
The IRS blessed the transaction because a number of structural safeguards built into the deal prevented the PHO and its assets from being controlled by physicians, a situation that could have jeopardized the hospital's tax exemption. One key feature was limiting physician representation on the PHO governing board to 20%.
Since the disclosure of the decision, copies of the Sept. 29 private-letter ruling have surfaced and are being used by healthcare attorneys to aid in assembling or dismantling PHO deals.
How attorneys are using the ruling depends on whom they represent, said attorney Thomas Greeson, general counsel for the American College of Radiology. He also represents a number of physicians who have been approached by hospitals to become members of a PHO.
"Hospitals will use the ruling to try to get favorable terms from physicians," he said. "Doctors will use the ruling to try to get out of PHO arrangements."
The key issue addressed in the ruling, and of concern to hospitals and physicians, is who controls the PHO.
In the transaction that was the subject of the ruling, the terms that were acceptable to the IRS put physicians at a disadvantage, Mr. Greeson said.
In addition to the 20% limitation on board representation, physician members of the PHO didn't have any authority to negotiate contracts and wouldn't manage the day-to-day operations of the PHO. Those responsibilities were assigned to the hospital-dominated PHO board or a price-negotiating committee of the board.
Physicians would be wise to think twice about getting involved in such arrangements because of the lack of physician control and incentives, Mr. Greeson said.
On the other side of the negotiating table, however, sit hospital attorneys, who likely will use the ruling to obtain favorable terms from physicians.
In fact, one hospital attorney, who requested anonymity, said the ruling is great evidence to bring to the table to convince physicians that limitations on their authority are needed to protect the hospital's tax-exempt status.
It was precisely those concerns that led to the conditions outlined in the ruling in the first place, said David Teasley, M.D., former chief of staff at 105-bed Williamsburg (Va.) Community Hospital, which sought the ruling from the IRS.
"We bent over backward for the hospital," he said. "All the conditions were designed to protect the hospital."
Dr. Teasley, who chaired the steering committee that developed the proposed PHO, disputed speculation that the limitations on physician governance prompted the hospital and physicians to pull the plug on the PHO months before the IRS made its decision. "It was the process itself that derailed the PHO as much as anything else," he said.
Because of all the safeguards and legal approvals sought by the hospital, the process dragged on for months, Dr. Teasley said. During that period, the two sides lost the momentum for putting together a PHO, and many of the physicians began looking at other opportunities, he said.