A private-letter ruling by the Internal Revenue Service recently surfaced, clarifying acceptable recruiting practices that not-for-profit hospitals can use without jeopardizing their tax-exempt status, tax lawyers said.
The unreleased document, dated July 31, 1998, is the first private-letter ruling on physician recruitment since the IRS issued hospital audit guidelines in 1992.
Other IRS guidance on physician recruitment includes a 1994 tax case settlement with Hermann Hospital in Houston, which further defined some guidelines under which hospitals could safely recruit physicians. That deal approved an arrangement whereby Hermann could pay a maximum of 50% of what headhunter fees for physician recruitment would have cost.
Under a 1997 revenue ruling, which has the force of law, hospitals found to have violated the kickback laws can lose their tax-exempt status.
The Hermann case and the private-letter ruling legally apply only to the parties involved and are limited to the circumstances described in the letter. The industry closely watches such decisions, however, because they expand the boundaries of narrower revenue rulings. Hospitals and health lawyers use them in structuring physician recruitment strategies that might meet the letter of federal law.
The latest ruling, a 16-page response to a request from an unnamed urban, not-for-profit hospital system, allows hospitals to use signing bonuses and other relocation incentives to help recruit doctors under limited conditions, said Todd Greenwalt, a lawyer with the Houston firm Vinson & Elkins.
Greenwalt is well-placed to comment on the topic. He not only requested the latest private-letter ruling but also structured Hermann's closing agreement.
In the recent case, the system sought IRS approval of its physician recruiting. It wanted to bolster its network of satellite clinics and help group practices affiliated with its hospital by adding primary-care doctors from within its immediate geographic service area.
The system recognized that using certain incentives to recruit local doctors could violate numerous federal laws aimed at preventing kickbacks, inappropriate physician self-referrals and tax violations.
Laws covering tax exemptions for not-for-profit hospitals prohibit the use of charitable money to benefit private individuals. Federal laws governing fraud and abuse bar any form of remuneration to induce patient referrals.
So the hospital system requesting the private-letter ruling sought to limit recruiting efforts to doctors whose practices were foundering, reasoning that doctors with few patients weren't in a position to refer patients.
The hospital needed to show the IRS that it needed such physicians and that by recruiting those doctors, who would need to relocate their practices to be from five to 10 miles away, the hospital was meeting its charitable mission. The hospital also had to prove its charitable earnings would not benefit the doctors.
The hospital sought to recruit physicians into existing group practices by using such incentives as loan forgiveness, income guarantees and signing bonuses.
The IRS approved the practice defined within the private-letter ruling, known as cross-town recruiting, as long as the recruited doctors didn't generate significant referrals.
"I think it (the letter ruling) is a helpful development and a helpful confirmation," Greenwalt said.
Thomas Hyatt, a healthcare tax lawyer with the Washington firm Ober, Kaler, Grimes & Shriver, said the ruling is evolutionary, not revolutionary.
"I think it is significant but not major news," Hyatt said. "It's helpful in further understanding the limits of physician recruiting (that are) permissible by the IRS."
Hyatt said the ruling also puts to rest a few issues worrying hospitals and their lawyers, such as how to legally recruit physicians into existing group practices.
"Any recruiter will tell you that the most successful way to recruit a physician is into an existing group practice," he said.
"Physicians do better when they enter existing practices, and hospitals prefer to go that way," Hyatt said. "But there were concerns that it was not allowable."
Mary Grealy, chief Washington counsel for the American Hospital Association, said the AHA welcomes the ruling.
"We're in an era of heightened compliance, and this kind of request shows that hospitals are trying to recruit physicians without jeopardizing their tax-exempt status," she said.
Hospitals need the kind of guidance the letter seems to offer the industry, she said.
Many of the practices described in the private-letter ruling are already common in the hospital industry.
A 1998 survey by St. Louis-based Cejka & Co. revealed that hospitals continue to attract physicians through incentives, some of which could be problematic under federal tax and anti-fraud laws. The survey of 267 hospitals and health systems showed that about 65% of responding hospitals paid moving expenses and provided compensation guarantees, while 60% paid the recruited doctors' malpractice insurance. Less than 30% offered signing bonuses and loan forgiveness. Only 16% admitted to paying recruiting expenses for group practices, and just under 8% said they bought group practices.