April 2009

President's Message

Increased transparency and regulatory enforcement highlight the need for hospitals to re-evaluate physician recruitment practices to ensure compliance with Federal guidelines.  Those not taking a pro-active stance in light of heightened scrutiny face the risk of having their tax-exempt status questioned by Federal regulators.

The Federal government continues to devote increased resources toward evaluating the appropriateness of a hospital’s tax-exempt status.  The IRS Form 990 redesign provides a clear indication of the government’s desire to improve transparency and increase enforcement of tax exemption-related rules and regulations.  Although such regulations for physician recruitment have been in place for over two decades, the government has yet to apply resources necessary for consistent enforcement.

In what can be seen as a warning sign of what is coming, the 2009 Inpatient Prospective Payment System Final Rule includes a “test run” for acquiring hospital information regarding financial relationships with physicians.  The Disclosure of Financial Relationships Report will be sent to 500 hospitals and will serve as a preliminary audit of hospital/physician relationships.  While this process relates most specifically to ensuring compliance with physician self-referral statutes, it certainly speaks to the government’s intent to more closely monitor hospital/physician arrangements.  This is likely just a first step, future auditing procedures are expected to probe more deeply into recruitment practices, specifically regarding whether a tax-exempt hospital is adhering to Federal recruitment guidelines.

Demonstrating Community Benefit

As a tax-exempt entity, the IRS wants to ensure that a hospital’s physician recruitment practices are not financially benefiting private individuals, and recruitment incentives are considered a benefit.  If this illegal practice of “inurement” is taking place, a hospital could potentially lose its not-for-profit status.

Beginning in 1986, the IRS has provided guidance on how to appropriately structure permissible recruiting agreements.  In summary, reasonable recruitment incentives can be provided to physicians if the benefit provided to that physician is incidental to the benefits that physician will provide to the hospital’s community.  The primary method of demonstrating community benefit is to provide an objective assessment of community need for the services the physician will provide. 

Although the IRS evaluates physician recruiting on a case by case basis, it has provided guidance regarding the types of recruitment incentives that hospitals may offer.  The table below includes recruitment incentives outlined by the IRS in Revenue Ruling 97-21:

The IRS also provided guidance on ways to demonstrate community benefit in its 1994 closing agreement with Hermann Hospital in Texas.  Although such agreements only apply to the subject party, it nonetheless provides guidance for demonstrating community need.  According to the terms of this agreement, one or more of the following must apply for a hospital to pay recruiting incentives based on community benefit:

1. A calculated specialty deficiency based on supply and total market need, demonstrated through the application of industry benchmarks or ratios;

2. Demand for a medical service in the community coupled with a documented lack of availability or long waiting periods;
   
3. Federal designation as a Health Professional Shortage Area (HPSA);

4. A demonstrated reluctance of physicians to relocate to a hospital due to location (including rural or economically disadvantaged areas);
   
   
5. A reasonably expected reduction in number of physicians of a specialty serving the hospital’s service area due to anticipated retirements within the next three years; or,
   
   
6. A documented lack of physicians serving indigent or Medicaid patients, provided the recruit commits to serve a “substantial number” of those patients.

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