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Archive for the ‘Tax Exempt Issues’ Category

IRS Proposed Regulations Defining Section 501(r) Responsibilities

Tuesday, July 10th, 2012

In the week before the Supreme Court decided the landmark case upholding the Affordable Care Act, the Treasury Department issued proposed regulations providing regulatory detail on the aspects of new Code Section 501(r) that regulates a non‑profit hospital’s financial assistance programs.  We have previously covered the requirement that a 501(c)(3) organization conduct a Community Health Needs Assessment (CHNA) but have not previously covered some of the other requirements of Section 501(r).

 The Supreme Court’s recent affirmation of the Affordable Care Act means that the requirements of Section 501(r), including the financial assistance portions of that provision, will go forward as planned.

 The Treasury Department’s new proposed regulations provide guidance on the requirements for complying with Code Sections 501(r)(4)-(6) which require hospitals to establish financial assistance policies, limit certain charges to financial assistance eligible individuals, and regulates billing and collection methods.

 Financial Assistance Policy

 Section 501(r)(4) requires a hospital organization to establish a written financial assistance policy (“FAP”) and a written policy relating to emergency medical care.  Both policies are required to include specific information. 

 The proposed regulation further identifies the information that a hospital facility is required to include in its FAP and the methods a hospital facility must use to publicize its FAP.  What a hospital facility must include in its emergency medical care policy is also clarified.

 Limitation on Charges to FAP-eligible Persons

 Section 501(r)(5) requires a hospital organization to limit amounts charged for medically necessary care provided to FAP-eligible persons to not more than the amount that would be billed to individuals who have insurance covering such care (“AGB”).  

 What does AGB Stand for?

 The proposed regulation describes how a hospital facility determines the AGB it can charge a FAP-eligible individual for medically necessary care.  A hospital facility will not fail to satisfy this requirement if it charges an individual more than AGB, as long the hospital facility is complying with all requirements regarding notifying individuals about the FAP, responding to submitted applications, and correcting the amount charged if the individual is later found to be FAP-eligible.

 Extraordinary Collection Efforts

 Section 501(r)(6) requires a hospital organization to make reasonable efforts to determine whether an individual is FAP-eligible before engaging in extraordinary collection actions against the person.

 The proposed regulation clarifies what actions are “extraordinary collections actions” and the “reasonable efforts” that a hospital facility must make to determine FAP-eligibility before engaging in such actions.

 What Entities Does Section 501(r) Apply To?

 Finally, the proposed regulations also provide guidance on which entities are required to meet the requirements of the above-mentioned sections.  Specifically, a definitions section defines “hospital organization,” “hospital facility,” and other key terms used in the regulation.

 Hospital facilities are encouraged to review their policies regarding FAP and consider how these proposed regulations may impose new requirements for maintaining their tax-exempt status.  In addition, the Department of Treasury invites comments and requests for a public hearing until September 24, 2012.

 For further information, please contact Mary Ellen Schill, John H. Fisher, CHC or your regular Ruder Ware attorney contact.

Physician Compensation Stark Law Compliance Excessive Compensation

Monday, January 23rd, 2012

Physician Compensation – Recent Cases Illustrate Risks of Excessive Payments Under Medical Director Agreements

Physician compensation is changing along with the reconfiguration of payment incentives within the health care industry.  Physician compensation issues may be one of the biggest issues affecting the relationship between health care systems and physicians as these changes continue.  These changes are reflected in a number of recent decisions that provide some guidance on the legal topics that affect physician compensation.

One of the most important laws that affect physician compensation for physicians who are employed by a health care system is the Federal Stark Law.  The Stark law prohibits financial relationships between physicians and other providers to which the physicians make referrals for “designated health services.”  It is fair to say that virtually every relationship between a physician and a hospital will involve the referral of designated health services.  Therefore, the Stark Law will nearly always come into play and the payment pursuant to the employment agreement must be structured to comply with the Stark Law.

The Stark Law is a strict liability statute and does not require a showing of intent to violate its terms.  It is implicated based on referrals unless there is an applicable exception that applies to the referral arrangement.  In the case of employed physicians, there is an exception that covers bona-fide employment relationships that can be used to exempt the relationship provided that all of the conditions of that exception are strictly followed.  A bona-fide employment relationship must meet all of the following requirements:

  • the employment must be for “identifiable services”
  • the amount of remuneration must be consistent with fair market value
  • the amount of the remuneration cannot be determined in any manner that takes into account the volume or value of referrals by the referring physician
  • the compensation must be “commercially reasonable” even if no referrals were made between the physician and the organization

The recent cases have focused on the issue of “fair market value” and “commercial reasonableness” of the compensation paid from the hospital or health system to the employed physician.  These cases provide some guidance and parameters to examine when negotiating physician compensation.  However, the factual situations in the recent cases are unique and the extent that they will be of guidance to any specific compensation issue is uncertain.

The most recent case United States v. Campbell, 2011 U.S. Dist. LEXIS 1207 (2011) and arises out of the United States District Court of New Jersey.  The case involved the University of Medicine and Dentistry of New Jersey (UMDNJ) which was at risk of losing its Level I Trauma Center license due to a shortage in the number of cardiac procedures performed at the facility.  In order to secure its Level 1 Trauma Center status, UMDNJ developed a recruitment initiative directed towards increasing the number of cardiothoracic patients being served at the hospital.  This initiative focused on entering part-time employment arrangements with local cardiologists who were in a position to refer cardiology patients to the hospital.

The part time arrangements involved entering Clinical Assistant Professor Agreements with these cardiologists which enumerated a list of teaching, lecturing and research activities that the physician were to perform.  The physician in turn received salaries ranging from $50,000 to $180,000 per year.  The physician at issue in the case, Dr. Campbell, entered a part time employment agreement to perform a specific list of teaching related services for UMDNJ.

The US Attorney brought charges against Dr. Campbell and UMDNJ based upon alleged violations of the Stark Law and the Anti-kickback Statute.  The government contended that the primary service actually performed by Dr. Campbell under his part time employment contract was to refer cardiology patients to the hospital and that the contract was actually a sham arrangement designed to cover up payments for referral of cardiology patients.  Through the process, a federally appointed monitor reviewed the arrangements and concluded that the hospital’s program was an illegal device to compensate cardiologists for patient referrals.

The Court in the case was faced with deciding whether the case should be dismissed for failure to state a claim.  In refusing to dismiss the claims made by the government, the Court analyzed the Stark Law employment exception which requires that the payment of compensation to an employee who is in a position to make referrals for designated health services be at fair market value for the services  that are actually provided and that the arrangement be commercially reasonable.

The Court refused to dismiss the case noting that if “there was no requirement to actually perform the duties of [the contract] then the compensation could not be the fair market value for those services….”  The Court concluded that the payment above fair market value for the services that were actually required to be performed would serve some other purpose, such as compensation for referrals.  In the Court’s opinion, the excess payments would violate the Stark Law and would make claims made to Medicare for those services false claims.

This case points out an important point under the Stark Law fair market value employment exception.  Even though there might be a detailed listing of obligations under a contract, there must be some assurances that those services are actually provided.  If the services are not provided, the excess compensation will be considered to be for another purpose such as the inducement for referrals.  As a compliance matter, health care organizations should monitor their contracts to assure that the specific services are actually being performed.  The employed physician and the facility have equal interest in assuring this as both would be in violation of the Stark Law if the services are not provided.

A recent criminal case under the Anti-kickback Statute provides another illustration of the risks associated with medical director agreements that are not properly monitored or, in extreme cases are entered for improper purposes.

The recent criminal case of United States v. Borrasi further reinforces this point and illustrates that there are cases where “sham” medical director payments can lead to criminal liability under the federal anti-kickback statute.  In Borrasi, a physician was convicted criminally under the Anti-kickback Statute for conspiring to receive bribes from a nursing home for referring patients to the facility.  The jury found that the physician and others were placed on the organization’s payroll as “service medical directors.”  They were provided with compensation for a list of services that, according to testimony at trial, they were never really expected to perform.  There was also testimony from employees that the “medical directors” were rarely seen around the facility and that time reports had been falsified in order to make it appear that they performed services at the facility.

In addition to compensation for what were found to be “sham” medical director services, the nursing home also paid for a secretary for the physician’s company and paid lease payments for the building owned by the physician.  There was also testimony that the physician had said to others that he was receiving “free money” from the facility.

From the published case, it appears that the facts in this case were extreme.  However, the case holds value because it further indicates the risks involved with medical director contracts.  In this case there were criminal consequences for the “sham” medical director agreement.  In Borrasi, the government carried its burden of demonstrating that the payments were intended to induce referrals.  In order to prove a criminal conviction, the government must show that “intent” to induce referrals was one of the purposes for the payment arrangement.

Cases where intent cannot be proved may still lead to liability under the Stark Law.  Although no one goes to jail under the Stark Law, the financial consequences can be severe and involve repayment of reimbursement and civil penalties.  Penalties are not inconsequential and can be large enough to cause a great deal of financial damage to the party who is found to be in violation.

Health Care Governance Issues – AHA Hospital Board Resources

Thursday, January 5th, 2012

Hospital Governance – Great Resource for Hospital Boards and Governance Issues

Hospital Board Committee StructureThe post is just a health care “Resource Alert.”  The AHA has a great resource available on health care governance issues.  The Center for Healthcare Governance is loaded with useful resources and links for Board members and others who have an interest in the operation of health care boards and governance issues.

From the site:

Backed by the knowledge and resources of the American Hospital Association, the Center for Healthcare Governance (Center) provides state-of-the-art education, research, publications, services, tools, and other governance resources to help you achieve and maintain consistency and excellence throughout your governance program. Our community is dynamic and diverse, representing board members, executives, and governance advisors who are nationally recognized as the foremost voices in the practice of hospital and health system governance. We all share a common goal: to advocate and support excellence, innovation and accountability in health care governance.

The Center for Healthcare Governance is well worth checking out if you are looking for information on governance structure in the healthcare area.

Anti-kickback Statutes Safe Harbor Regulations

Thursday, December 8th, 2011

Anti-kickback Statutes and Safe Harbor Regulations

Medicare Antikickback Statute Safe HarborsOverview: On the books since 1972, the federal anti-kickback law’s main purpose is to protect patients and the federal health care programs from fraud and abuse by curtailing the corrupting influence of money on health care decisions. Straightforward but broad, the law states that anyone who knowingly and willfully receives or pays anything of value to influence the referral of federal health care program business, including Medicare and Medicaid, can be held accountable for a felony. Violations of the law are punishable by up to five years in prison, criminal fines up to $25,000, administrative civil money penalties up to $50,000, and exclusion from participation in federal health care programs.

Because the law is broad on its face, concerns arose among health care providers that some relatively innocuous — and in some cases even beneficial — commercial arrangements are prohibited by the anti-kickback law. Responding to these concerns, Congress in 1987 authorized the Department to issue regulations designating specific “safe harbors” for various payment and business practices that, while potentially prohibited by the law, would not be prosecuted.

Hospital Tax Exemption Basics

Tuesday, May 11th, 2010

Hospital Tax Exemption – An Overview

The recent release of the IRS Final Report in its three year long Exempt Organization Hospital Study is only one example of the increased scrutiny by the federal government into the exampt status of hospitals.  The critics state that the distinction between the services provided by tax exempt hospitals and for-profit hospitals has blurred over time.  This has lead to increased scrutiny on Capitol Hill as well as inside the IRS.  More and more, hospitals are being put in the spotlight and being asked to justify their tax exemption.  As bailouts and other use of federal funds create more sensitivity with the public, hospitals can expect more questions to be asked about ther public benefits that justify tax exempt status, whether or not this inquiry is a fair one.

If a hospital qualifies as a “charitable organization,” it is generally exempt from paying federal income taxes.  In order for a hospital to receive and maintain this tax exempt status, it must meet very specific requirements that are set forth in federal tax law and in IRS regulations.  Generally, all of these specific requirements and tests focus on two principal factors that tax exempt organization must meet.  First, they must be organized and operated exclusively for at least one of the specific purposes laid out in the Internal Revenue Code.  Second, no portion of the hospital’s earnings may inure to the benefit of any private individual or owner.

There is no simple formula for when a specific hospital meets the IRS requirements.  The IRS looks at all of the facts and circumstances to make the determination of tax exempt status. Some of these factors include whether the hospital has a full-time emergency room where service is provided without reference to the ability to pay, whether the medical staff is open, whether the governing board include independent representatives that are drawn from the community, whether services are provided to patients with Medicare and Medicaid coverage, whether training, education and research are performed, and whether the organization has a formal charity care policy.

One significant factor under the “private inurement” test, is whether any excess benefit is confered on certain qualified persons.  In March of 1998, the IRS finalized rules regarding “excess benefit transactions,” and their effect on a hospital’s tax exempt status.  Excess benefits transactions occur when certain qualified individuals are provided with benefits that are in excess of fair market value or when the benefit is otherwise unreasonable under the circumstances.  Excess benefit transaction expose the organization to the imposition of an excise tax.  The IRS regulations had been pending since 1995 and contained very few changes in their final form.  The regulations set forth some factors that the IRS will look at when assessing whether to revoke a hospital’s tax exempt status as a result of excess benefit transactions.  The factors shed some light on when the IRS will consider the excess benefits to be significant in relationship to the overall activities of the hospital.

One important factor that was considered by the IRS was whether the organization has implimented safeguards that are reasonably calculated to prevent excess benefit transactions.  It is recomended that all hospitals impliment policies to safeguard against excess benefit transactions.  The organization should consider implimenting these policies as a matter of general corporate or fiscal management.  However, the IRS will also consider safeguards that are implimented in reaction to the specific excess benefit transaction that may be at issue.

John H. Fisher

Health Care Counsel
Ruder Ware, L.L.S.C.
500 First Street, Suite 8000
P.O. Box 8050
Wausau, WI 54402-8050

Tel 715.845.4336
Fax 715.845.2718

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