Hospitals buying doc practices may reap tax savings after IRS ruling

A new Internal Revenue Service ruling could mean significant tax savings for investor-owned hospitals and management companies that operate physician practices in states that bar the corporate practice of medicine.

But a number of for-profit hospitals and management companies might take a wait-and-see approach before applying the ruling to their own situations, some experts say.

Many states have laws that allow only licensed physicians to employ individual physicians in the practice of medicine. The idea is to keep anyone who isn't a medical practitioner from exercising undue influence over doctors' clinical judgments. But as hospitals and other entities have acquired physician practices in recent years, they've had to perform some legal gymnastics to do so.

Essentially, some for-profit hospitals and management companies have been acting like owners without actually being able to include the practices as subsidiaries on their tax returns. That means they couldn't use any of a practice's losses to offset taxes on other income, said Kelvin Ault, a partner at PricewaterhouseCoopers in Nashville who represents the organization that sought the ruling, which he declined to identify.

But the IRS private-letter ruling, published in the Federal Register on Dec. 19, allows Ault's client organization to consolidate its operations when filing federal taxes despite a state corporate practice of medicine law. The IRS private-letter ruling did not name the organization.

Ault said under the ruling, profits also would be combined with those of a company's subsidiaries and subject to taxes. The ruling does not apply to not-for-profit healthcare organizations because they are tax-exempt.

“The IRS has said, 'If you have effective control over them, you can consolidate them and should consolidate them,' ” said Angela Humphreys, a partner at Bass, Berry and Sims in Nashville who also represents the organization that sought the ruling.

While the IRS ruling formally applies only to the organization she represents, it's common for similar organizations to use such rulings as guidance on what may be done in the future, Humphreys said.

Ault said other healthcare organizations “will take a look at this ruling and say, 'Hey, there's an opportunity here that we believe applies to our situation.' Those companies can then decide whether they just want to start filing tax returns or pursue their own ruling.”

The ruling could be significant in states where corporate practice of medicine laws are still vigorously enforced, said Peter Pavarini, co-leader of the Squire Patton Boggs Healthcare Practice Group and president of the American Health Lawyers Association. Though the laws are technically on the books in many states, only about a dozen states actively enforce them. California, New Jersey and Texas are states that aggressively interpret such laws, he said.

The new IRS private-letter ruling is “a big deal if you're in one of those states,” he added. California, for example, is home to for-profit hospital chain Prime Healthcare Services, while Texas has for-profit hospital giant Tenet Healthcare Corp. Neither of those systems responded to requests for comment on the ruling.

That doesn't necessarily mean, however, that organizations will rush to apply the ruling to their own tax filings or start scooping up more physician practices as a result, said Don Stuart, chairman of the American Health Lawyers Association's tax and finance practice group and a partner at Waller Lansden Dortch & Davis in Nashville. “People are going to take a look at this, but I don't think it's going to generate any sort of immediate action like that,” he said. Organizations will likely have to take time to evaluate the impact of the ruling on a state-by-state basis.

For example, it's unclear how states with strong corporate practice of medicine laws might consider consolidation on federal tax returns in light of those laws, Stuart said. “They may view it negatively, and it may cause the structure you have in place to be viewed as suspect.”

Paula Torch, a senior healthcare research analyst with Avondale Partners in Nashville, also said it's too early to predict how the ruling might affect hospitals' bottom lines. “My sense is that any gains could be modestly incremental and unlikely to provide a strong incentive for hospitals to begin or increase their purchasing of physician practices,” she said. “I think it's a wait and see.”

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