The Internal Revenue Service has given its nod to two hospital programs that would reward independent doctors who improve the efficiency and quality of hospital services.
In separate private-letter rulings, the IRS determined that the programs would be consistent with the hospitals' tax-exempt status. However, so-called physician gain-sharing has yet to pass muster with other key regulators.
Specifically, HHS' inspector general's office is reviewing several proposed programs, including those cleared by the IRS, to determine whether they might induce physicians to limit services to Medicare and Medicaid patients. Also, HCFA is considering whether such deals comply with Stark self-referral laws.
Both agencies are expected to issue edicts within several months.
Meanwhile, the IRS rulings are the first the agency has issued regarding physician gain-sharing programs.
The rulings were issued in late January, but the IRS has not yet released them. Their existence was revealed through e-mail messages to healthcare clients and other interested parties by the hospitals' law firm, Sonnenschein, Nath & Rosenthal, based in Chicago.
According to the firm, the rulings pertain to similar programs developed by two unidentified hospitals. Each involves one or more groups of cardiologists that agreed to help develop and implement "process improvement initiatives."
The IRS determined that the programs do not constitute prohibited inurement, meaning that the hospitals' charitable monies aren't being used to benefit private individuals.
According to Sonnenschein, the IRS based its conclusion on important factors such as the cost savings that would result from the programs and the requirement that an independent third party review the fair market value of payments to the physicians (See chart).
Stacey Murphy, a partner in the law firm's St. Louis office, said the hospitals also submitted their programs to HHS' inspector general's office last spring and are waiting for that ruling before deciding whether to implement the programs.
Murphy called the inspector general's approval "a little bit of a higher hurdle," in part because it's a new area for the agency.
In the early 1990s, the IRS sent hospitals scrambling for new ways to align their financial incentives with those of physicians by issuing a series of private-letter rulings on hospital-physician joint ventures. The negative rulings said the ventures had more to do with rewarding physicians and maintaining their patient referrals than with improving patient care.
Kevin Outterson, a partner with the Memphis, Tenn.-based firm Baker, Donelson, Bearman & Caldwell, said he believes it will be much more difficult for gain-sharing to win the approvals of the inspector general's office and HCFA.
"That (IRS opinion) would in no way encourage me as a hospital general counsel to go ahead and implement a program," he said.
Outterson said the inspector general's office and HCFA have hired a consultant, at the expense of several hospitals that requested the rulings, to study the implications of physician gain-sharing.