Editor's note: The Internal Revenue Service's recent release of a groundbreaking proposed revenue ruling on not-for-profit hospitals' physician-recruitment tactics (March 20, p. 3) elicited a strong response from attorneys and consultants across the country. Some like it, some don't. We asked five experts to comment on specific portions of the proposed ruling: demonstrated need for physicians, reasonableness of recruitment incentives, board approval of recruitment pacts, relationship with Hermann Hospital recruitment guidelines and interplay with the Medicare anti-kickback laws.
A tax-exempt organization should document that recruitment incentives fulfill its charitable mission before offering them to physicians. The IRS' recently proposed revenue ruling provides guidance on how to accomplish this task.
A hospital must demonstrate that the community needs the physician or that the hospital's need for the physician benefits the community. It is not sufficient merely to demonstrate that the physician will improve the hospital's financial condition. The hospital should survey its community and document all evidence of need.
Such evidence can include population-to-physician specialty ratios and documentation that indigent patients or Medicaid recipients are being underserved by a particular specialty.-Gerald Peters, attorney with Latham & Watkins in San Francisco
With its proposed revenue ruling, the IRS is shying away from blanket statements and going back to evaluating an overall financial package. This is good news for healthcare providers because the ability to attract needed physicians often relies not just on money but on flexibility and creativeness in meeting physician requests.
The recognition of signing bonuses, malpractice insurance and practice start-up costs as acceptable incentives will encourage providers to offer them more freely.
Although the IRS didn't present specifics on the value of incentives, some mentions in the ruling will be helpful-particularly the point that net income guarantees and rent for office space must be reasonable and based on market compensation and rates.-Roger Bonds, president of the National Institute of Physician Recruitment and Retention
One of the more significant concepts in the IRS' proposed revenue ruling is the suggestion that hospital governing boards assume direct involvement in the review and approval of specific physician-recruitment incentive packages. This would be a major policy shift for the IRS.
Each of the four "blessed" recruitment scenarios in the ruling describes a recruitment package that's been "approved by the hospital's board of directors or its designee." This strongly suggests that the IRS' willingness to approve a particular recruitment package is based on the oversight provided by the board, which is composed of independent community leaders.
The IRS in past audit guidelines suggested that boards simply review loans to doctors.-Michael Peregrine, attorney with Gardner, Carton & Douglas in Chicago
The IRS' proposed revenue ruling is a significant improvement over the physician-recruitment guidelines the agency set forth in last year's Hermann Hospital closing agreement because it will have general applicability.
The Hermann guidelines (Oct. 24, 1994, p. 2) were useful in their specificity and covered more territory than the IRS' recently proposed ruling. Unfortunately, they were substantially more restrictive than prior positions taken by the IRS, in part, because they were used as corrective action against one hospital.
The new ruling's "safe harbor" approach is beneficial because it permits healthcare organizations to provide justifications for the incentives they use based on specific facts and circumstances.-Thomas Hyatt, attorney with Powers Pyles Sutter & Verville in Washington
The IRS' proposed ruling, if made final, would level the playing field in physician recruitment between tax-exempt and investor-owned hospitals, both of which are subject to the anti-kickback provisions of the fraud and abuse statutes.
One hospital in the ruling lost its exemption because it was found guilty of criminal kickback violations.
The ruling makes clear that tax-exempt hospitals need not attempt to quantify community benefits from recruiting a physician. This analysis was virtually impossible to complete without quantifying expected admissions and referrals-a suspect exercise under the kickback laws.
The ruling also makes clear that only a criminal action involving substantial hospital assets and activities justifies exemption revocation.-Elizabeth Mills, attorney with McDermott, Will & Emery in Chicago