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.