• IRS Issues New Reference Guide for Tax-Exempt Health Care Providers
  • December 10, 2003 | Author: Joseph L. Ardery
  • Law Firm: Frost Brown Todd LLC - Louisville Office
  • The Internal Revenue Service recently issued a "Health Care Provider Reference Guide" which summarizes effectively the Service's positions on many issues relating to tax-exempt hospitals and other tax-exempt health care providers.

    The Guide states that it is meant to aid IRS personnel in considering the applications of providers seeking IRS determinations that they are exempt under Section 501(c)(3) of the Internal Revenue Code. Its usefulness extends, however, beyond that important purpose.

    Governing board members, compliance officers, members of compliance committees can use the Guide and the checklist attached to it as a first step in determine whether the tax-exempt health care provider they serve may have problems if the IRS ever conducts an audit.

    Here are a few of the topics addressed in the Guide which tax specialists most frequently encounter in their service to their clients:

    • The tax exempt health care provider should have a "community board" in which a majority of the members are "independent persons." The Guide notes the longstanding IRS position that "practicing physicians affiliated with the hospital, officers, department heads, and other employees . . . are not independent."

    • The board's adoption and enforcement of a written conflict of interest policy "while not mandatory" is important and, according to the IRS, "almost universal because it represents an important opportunity for health care providers to avoid private benefit, inurement, and intermediate sanctions violations." The Guide includes a sample conflict of interest policy recommended by the IRS.

    • General acute care hospitals should have a truly "open" medical staff. Where certain physicians are excluded in order to benefit physicians who are loyal admitters to the hospital there is a serious question whether prohibited private benefits may exist.

    • The provision of true charity care is relevant in determining whether a hospital merits exempt status. The IRS states that "hospital bad debt is not considered to be charity care" and "charity care policies must be available to the public."

    • Leases of physician office space to physicians already practicing in the community "must be at fair market value and the hospital should [be able to] explain how it arrived at a commercially reasonable lease."

    • Hospitals may purchase medical practices, imaging centers, and other physician owned for-profit health care operations and then contract back with the selling physicians to operate such services as part of the hospitals' 501(c)(3) exempt activity. But the hospital should be in a position to justify all dollar amounts in the purchase and service arrangements.

    • Hospitals may use financial incentives to recruit physicians either to their medical staffs or more generally to the communities they serve. The IRS takes the position that these incentives may include "bonuses, housing or moving allowances, guaranteed income allowances, or below market rental of office space." (Experienced compliance officers will note that satisfying the IRS on this score may not solve all potential legal problems with other federal agencies.)

    • Joint ventures with for-profit entities will not violate the rules applicable to exempt organizations, if the joint ventures are properly structured and adhere to the standards enunciated by the IRS in various other rulings. (The Guide does not account for the important recent decision of the United States Circuit Court of Appeals for the Fifth Circuit involving the St. David Health Care System in Austin, Texas. That decision is a must read for any exempt organization planning a joint venture with a taxable entity.)

    All in all, the Guide provides a very useful introduction to the views of the IRS on the principal topics facing tax-exempt health care providers.