IRS Tries Again: More Guidance Regarding Health Information Technology Cost-Sharing Arrangements

In an effort to allay concerns regarding its position on health information technology (HIT) cost-sharing arrangements between tax-exempt hospitals and medical staff physicians, the Internal Revenue Service (IRS) has released a series of six questions and answers (Q&As). The Q&As are available on the IRS website.

The Q&As follow up on an IRS internal directive issued to IRS staff in May 2007 regarding the treatment of cases in which tax-exempt hospitals engage in HIT cost-sharing arrangements to allow physicians to connect with the hospitals’ electronic health records (EHR) systems. (For coverage of the directive see our May 2007 Advisory Bulletin.) The IRS directive stated that tax-exempt hospitals would not be deemed to provide impermissible private benefit or inurement in violation of Section 501(c)(3) of the Internal Revenue Code if the cost-sharing arrangements met certain parameters.

The IRS issued its directive in response to action by the U.S. Department of Health and Human Services (HHS), which published anti-kickback safe harbors and Stark regulatory exceptions, effective October 2006, that allowed permitted organizations to share the cost of certain HIT and related services with referral sources. (A full description of the final HHS regulations is set forth in our August 2006 advisory bulletin.) Hospitals and physicians had anxiously awaited guidance from the IRS that would provide assurance that such cost-sharing arrangements would not run afoul of the tax law.

Rather than providing comfort, the IRS directive generated concern in some quarters. Observers suggested that the IRS guidance imposed further requirements, beyond those contained in the HHS regulations, in order for EHR cost-sharing arrangements to be deemed permissible. Commentators were particularly concerned about two parameters in the IRS directive: that (i) the hospital must make the HIT available to all of its medical staff physicians; and (ii) to the extent permitted by law, the hospital may access all of the electronic medical records created by a physician using the HIT items and services that the hospital subsidized. Some observers took the view that the IRS’s parameters went so far beyond the HHS regulations as to make the IRS’s position impracticable.

The Q&As make it clear that the May 2007 directive provides a “safe harbor” under the tax law and not a mandate, and that arrangements that do not meet its parameters will not necessarily create impermissible private benefit or inurement. Rather, the IRS will review those arrangements based on their particular facts and circumstances.

The Q&As clarify that a hospital does not have to ensure that the HIT and related services are available to all of its medical staff physicians at the same time. The hospital may, instead, provide access to various groups of physicians at different times, according to criteria related to meeting the health care needs of the community. In this situation, the hospital should establish a plan for providing such access.

The Q&As also clarify that a physician may deny a hospital access to electronic medical records created by the physician using the HIT and related services if that access would violate federal and state privacy laws or the physician’s contractual obligations to patients. Further, in the HIT subsidy agreement, the hospital and physician may agree to impose reasonable conditions on the hospital’s access. For example, the Q&As suggest that the agreement could allow the hospital to access a patient’s medical records only if that patient becomes a patient of the hospital. The physician might also deny the hospital access to a patient’s non-medical information, such as billing and insurance eligibility information.

Finally, the Q&As address the ramifications of a hospital providing a HIT subsidy to a physician who is a “disqualified person” for purposes of the intermediate sanctions rules under Section 4958 of the Internal Revenue Code. If the hospital meets all the parameters set out in the May directive, then the HIT subsidy will not be an “excess benefit transaction” that would subject the disqualified person to penalties. The Q&As do not address what the result would be if the hospital did not meet all of the directive’s parameters. Presumably the IRS would review the situation under all relevant facts and circumstances.