After a wait of more than two years, the Internal Revenue Service has issued a final revenue ruling outlining physician recruitment tactics that not-for-profit hospitals can use without risking their tax-exempt status.
Like the IRS' proposed revenue ruling published in March 1995, the final version gives hospitals a great deal of latitude in offering incentives to physicians to practice at their facilities. As long as an incentive is reasonable and the hospital can make a case that adding a particular physician furthers its charitable mission, almost anything goes under the ruling.
"I would consider it a pro-organization revenue ruling," said Marcus Owens, director of the IRS' exempt organizations technical division.
Douglas Mancino, a healthcare tax attorney with the Los Angeles office of McDermott, Will & Emery, said he was "very pleased with it."
Mancino, who chairs the exempt organizations committee of the American Bar Association's tax section, said, "What's important about the ruling is that it didn't prescribe one way of doing physician recruitment. The IRS isn't telling anyone how to do it. It gives hospitals a lot of latitude."
Under federal tax laws, the earnings of a charitable organization can't benefit, or "inure," a private individual. Such a charitable organization also can't be created or operated for the benefit of private interests.
Those restrictions apply to private not-for-profit hospitals designated as tax-exempt public charities under Section 501(c)(3) of the Internal Revenue Code.
The question raised by not-for-profits' physician recruitment tactics is whether the tactics and the money hospitals spend on them solely benefit the doctors or serve some higher charitable purpose.
Although Owens described physician recruitment as a "gray area" of tax law, and hospital tax attorneys and consultants have been clamoring for years for legal guidance on the issue, no not-for-profit has lost its tax exemption in decades for offering physician incentives.
More than 90% of hospitals that responded to a physician recruitment survey last year said they were actively luring doctors to their facilities using various incentives, despite the legal risk (Oct. 21, 1996, p. 42).
The 17-page revenue ruling outlines five physician recruitment scenarios and identifies reasons why the activities in the scenarios adhere to or violate federal tax codes.
In only the fifth scenario do the recruitment activities create a tax problem for a hospital, and that's only because the activities have been found to violate federal anti-kickback statutes. The ruling doesn't describe the activities engaged in by the hospital.
The statutes bar any form of remuneration to induce the referral of Medicare or Medicaid patients. Violations can be criminal, punishable by fines and imprisonment, or civil, punishable by fines and suspension or expulsion from Medicare and Medicaid.
To the IRS, a tax-exempt organization that commits a federal crime under another law doesn't deserve its preferential tax status.
The recruitment activities described in the approved scenarios include paying physicians signing bonuses, subsidizing their liability insurance, offering them discounted office space, guaranteeing them a mortgage, paying their moving expenses, offering them loans to start their practices and guaranteeing their income.
According to the ruling, the incentives were justified because having the physician on staff helped further the charitable mission of the hospital. The physicians did that by offering a medical service needed in the community.
Also of importance to the IRS was that the value of an incentive was reasonable, negotiated fairly between the hospital and the physician, and outlined in a written agreement. And, the IRS said, the agreement was in accordance with physician recruitment guidelines adopted by the hospital's board, which regularly reviews recruitment practices.
Michael Peregrine, a healthcare tax attorney with Gardner, Carton & Douglas in Chicago, said the ruling places a substantial emphasis on hospital boards having recruitment guidelines that executives must follow.
The IRS will publish the final revenue ruling in the May 5 Internal Revenue Bulletin. It will be effective immediately. Revenue rulings carry the weight of federal regulations and can be cited as legal precedent in disputes with the IRS.