Physician recruitment guidelines help nonprofits
Physician recruitment guidelines help nonprofits
The Internal Revenue Service recently issued a revenue ruling on the circumstances in which financial incentives offered to recruit physicians will not jeopardize a hospital’s tax-exempt status. The ruling has broad implications for tax-exempt health care organizations that recruit physicians or purchase physician practices.Revenue Ruling 97-21 describes five specific situations in which tax-exempt hospitals offered compensation and other financial incentives to physicians to join the hospital’s medical staff or provide medical services in the community. The ruling discusses whether those recruiting activities are consistent with regulatory requirements for tax-exempt status.
Under IRC section 501(c)(3), tax-exempt organizations may pay reasonable compensation to physicians for services, and IRS regulations provide guidance for determining reasonableness. The revenue ruling says that a more rigorous standard applies when a hospital recruits a physician for the purpose of providing services to members of the community. The hospital must be able to demonstrate not merely the reasonableness of the compensation and financial incentives package but also a strong relationship between the hospital’s charitable mission and the recruitment incentives it offers.
Four of the situations meet the IRS’s requirements. For each case, the ruling describes the community in which the hospital is located, the documented need for additional physicians in a given specialty, the hospital’s procedures for adopting the financial incentives, and the particular incentives offered to the physicians.
The fifth situation is a hospital that had been found guilty of violating the federal anti-kickback law as a result of its physician recruitment practices. The IRS ruled that the hospital does not qualify as a tax-exempt organization because its unlawful recruitment activities were inconsistent with its charitable purposes.
Implications for tax-exempt organizations
Being fact-specific, the revenue ruling does not provide general approval of any particular financial incentives. Rather, it illustrates a method of analysis that must be applied to determine whether any given recruitment incentive is consistent with an organization’s exempt purposes. Hospitals and other tax-exempt organizations should review their recruitment practices in light of this important ruling.Following are some of the key points of the ruling:
• Internal procedures.
The ruling emphasizes the role that boards of directors of tax-exempt organizations should play in approving recruitment incentives. In each of the "approved" situations, the recruitment incentive package was negotiated at arm’s length in accordance with guidelines that the hospital’s board of directors establishes, monitors, and regularly reviews. Each package was approved by a committee appointed by the board to approve medical-staff contracts. This attention to internal procedures is consistent with the new intermediate-sanctions law (Revenue Ruling 97-21).
• Needs assessment.
The ruling highlights the importance of obtaining objective evidence of a need for recruiting activity. Examples of evidence cited in the ruling include one hospital’s community-needs assessment that demonstrated a shortage of practitioners in the recruited physician’s specialty and another hospital’s location in a designated Health Professional Shortage Area for primary care physicians.
Analyze recruitment procedure
• No violation of fraud and abuse law.Although the ruling does not provide guidance on compliance with the fraud and abuse laws, the fifth case (the hospital whose recruitment incentives violated the anti-kickback law) is a reminder that an analysis of the recruitment incentive package must always be conducted to ensure that recruitment incentives do not violate the anti-kickback law or the Stark law, which prohibits physicians from referring Medicare and Medicaid patients to entities in which they have a financial interest.
• Reasonable financial incentives.
Although the ruling is fact-specific, the IRS identified several types of financial incentives it would consider reasonable in the circumstances presented in the ruling: a one-time signing bonus, payment of a physician’s malpractice insurance premium for a limited period, below-market rent for office space for a limited period, home mortgage guarantees, and private-practice income guarantees in amounts consistent with regional and national surveys of net income earned by physicians in the same specialty. Since the ruling does not place dollar limits on cash payments or time limits on subsidies, hospitals still have considerable flexibility in designing their recruitment incentives.
(Editor’s note: The above article was reprinted with permission from the June 6 issue of The Mercer Report; 69:3.)
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