• IRS Provides Needed Assurances to Tax-Exempt Hospitals Considering Subsidizing Electronic Health Records (EHR) Technology for Medical Staff
  • May 18, 2007 | Authors: Douglas W. Charnas; R. Brent Rawlings
  • Law Firms: McGuireWoods LLP - Washington Office ; McGuireWoods LLP - Richmond Office
  • The Internal Revenue Services (IRS) issued a brief, two-page memorandum on May 11, 2007 (the “Memorandum”), providing a directive that a hospital recognized as tax-exempt under Internal Revenue Code Section 501(c)(3) may, within specific parameters, provide members of its medical staff financial assistance to acquire EHR software and technical support without placing the hospital’s tax-exempt status at risk. The Memorandum provides a much needed clarification on the previously unresolved issue of whether providing such benefits to members of the medical staff would be regarded as impermissible private benefit or inurement in violation of Section 501(c)(3).

    The IRS directive is another in a series of relatively recent regulatory proclamations that are intended to clear the pathway for proliferation of interoperable electronic health records and a national health information network. Previously, on August 8, 2006, the Centers for Medicare and Medicaid Services (CMS) and the Department of Health and Human Services Office of Inspector General (OIG), respectively, published new regulations that created an exception to the Stark physician self-referral prohibition, 42 U.S.C. § 1395nn, (“Stark”) and a safe harbor for the Federal anti-kickback statute, 42 U.S.C. § 1320a-7b(b), (the “Anti-kickback Statute”) for arrangements involving the provision of software or information technology and training services necessary and used predominately to create, maintain, transmit, or receive electronic health records. The new exception and safe harbor became effective October 1, 2006, and will sunset on December 31, 2013.

    The Memorandum, from Lois G. Lerner, Director of Exempt Organizations, states that, in handling examination and exemption application cases involving Section 501(c)(3) hospitals, the IRS will not treat the provision of EHR software and technical support services as impermissible private benefit or inurement in violation of Section 501(c)(3) if the benefits provided “fall within the range of [EHR software and technical support] that are permissible under the [Stark exception and Anti-kickback Statute safe harbor].” In addition, the Memorandum provides that an arrangement to subsidize the provision of EHR software and technical support should have the following characteristics:

    1. The hospital enters into a subsidy agreement with its medical staff physicians for the provision of EHR software and technical support services at a discount (“Health IT Subsidy Arrangement”);
       
    2. The Health IT Subsidy Arrangement requires both the hospital and the participating physicians to comply with the Stark exception and Anti-kickback Statute safe harbor on a continuing basis;
       
    3. The Health IT Subsidy Arrangement provides that the hospital may, to the extent permitted by law, access all of the electronic medical records created by a physician using the subsidized EHR software and technical support services;
       
    4. The hospital ensures that the EHR software and technical support services are made available to all of its medical staff physicians; and
       
    5. The hospital provides the same level of subsidy to all of its medical staff physicians or varies the level of subsidy by applying criteria related to meeting the healthcare needs of the community.

    The Memorandum does not create any express dollar amount “cap” on the value of the subsidy that can be provided by hospitals. This is similar to the approach taken with the Stark exception and Anti-kickback Statute safe harbor for EHR, which likewise did not create an express limit on the value of donated items or services. However, the Stark exception and Anti-kickback Statute safe harbor do impose a cost-sharing requirement that the physician pay 15% of the hospital’s cost of the technology. The Memorandum appears to say that so long as the exception and safe harbor are met, including the cost-sharing requirement, the IRS is not likely to challenge a donation of EHR software and technical support services based upon the dollar amount of the subsidy provided.

    It should be noted that the Memorandum does not address the implications of tax-exempt organizations donating electronic prescribing hardware, software, or information technology and training services. CMS and OIG, respectively, have adopted regulations creating a Stark exception and Anti-kickback Statute safe harbor for arrangements involving the provision of electronic prescribing technology, but donations or subsidies of this type by Section 501(c)(3) hospitals are not addressed in the Memorandum.

    While the Memorandum sends a clear signal from the IRS that structuring arrangements to provide EHR software and technical support services in accordance with the Stark exception and Anti-kickback Statute safe harbor provides a strong assurance that a hospital’s tax-exempt status will not come under attack, there remain a number of unresolved gray areas in practice. For example, are there any limitations on categories of medical staff to which the subsidy must be made available? Is it sufficient to provide the subsidy only to active staff or must the subsidy be provided to all categories of medical staff, including courtesy or consulting? Also, the Memorandum permits a hospital to vary the level of subsidy by applying “criteria related to meeting the healthcare needs of the community,” but does not provide any guidance as to what those criteria are. In addition, hospitals will need to consider the implications of requiring physicians to provide open access to all of their medical records to the hospital. This requirement could impede physician adoption of available EHR software and technology.

    Despite the potential challenges in implementation of the Memorandum, it provides Section 501(c)(3) hospitals with another piece of the regulatory puzzle to allow them to proceed with implementation of a broader EHR strategy. The Memorandum highlights the importance of Section 501(c)(3) hospitals relying on the Stark exception and Anti-kickback safe harbor in arrangements involving the donation or subsidization of EHR software and technical support services, since failure to comply poses not only the risk of Stark, Anti-kickback Statute, and potential False Claims Act liability, but also could place a hospital’s tax-exempt status at risk.