September 16, 2015
The IRS has relaxed its rules on the perks you can be offered – but the limit stops short of the sky
Doctors willing to practice in under-served areas have long been deterred by poor economic prospects. After sizing up their job opportunities, they were lured to more-affluent regions by the generous incentives offered by group and for-profit hospitals. On the other hand, the tax-exempt hospitals typically found in undeserved regions were strictly limited by the IRS in their ability to recruit doctors to go into private practice in the community.
No longer. To make tax-exempt hospitals more competitive, the IRS modified its rules last year for recruiting doctors to open their own practice locally. Now, if your specialty fills a starmednstrated need, the hospital can offer you a compensation package that’s realistic enough to consider. This can be an excellent opportunity for physicians who want to practice as soloists.
The opportunity is not risk free, however. No matter how well a tax-exempt hospital complies with the revised IRS regulations, the Health Care Financing Administration may still consider, in some cases, that the incentives permitted under the new rules constitute inappropriate payment to doctors for Medicare and Medicaid referrals. The best defense is for both hospital and doctor to be able to show good-faith attempts to comply.
In working with tax-exempt hospitals, our firm gets help from Brian L. Andrew, chairman of the health-law group at Polsinelli, White, Vardeman & Shalton in St. Louis. Here’s how he explained the recent changes in IRS policy.
Historically, the IRS permitted tax-exempt hospitals to offer some limited recruitment incentives, but mainly to out-of-the-area doctors. The tax agency believed that if incentives were used to lure doctors already practicing in the same city, the hospital was merely shifting local physicians for its own benefit. It wasn’t expanding medical services to meet community needs, and, therefore, it was putting its tax-exempt status at risk.
The new regulations represent changes in IRS thinking.
More liberal residence requirements. Now, the agency recognizes that a hospital may serve a metro area containing millions of people, and that one community within the area may desperately need certain types of doctors, while another might be oversupplied. To illustrate circumstances under which a hospital may offer incentives to bring doctors to under-served areas, the IRS offers several examples. They apply both to out-of-town doctors and to ones from the same metro area.
A no-string signing bonus. What recruitment incentives can you now expect from a tax-exempt institution eager to have you open a practice nearby? For starters, a signing bonus that’s competitive with those offered in the private sector. Previously, the IRS frowned on any signing bonus, especially one paid to a doctor with an already-established local practice. The bonus was viewed as payment for nothing. When an out-of-town recruit received a bonus, it was usually $5,000 to $10,000.
“I used to counsel my hospital clients to offer signing bonuses bigger than that – but to structure them like loans,” says Andrew. “If the doctor left the community within two years, he’d have to refund the money.” As a result, many doctors balked when they learned the bonus had strings attached.
Now doctors with local practices as well as out-of-towners can receive bona fide bonuses, not loans that might have to be repaid. But the amount must be reasonable. While a specialist willing to relocate to a particular undesirable area might receive as much as $20,000 to $25,000, a bonus of $5,000 to $10,000 remains the norm for most doctors.
Assistance in starting your practice. This is a major new benefit. Previously, if a tax-exempt hospital recruited you to relocate, you had to pay prevailing rates for office rent. Now, says Andrew, the hospital can give you space in a building it owns, and charge you below market rent for a limited period of time – typically up to three years.
If it doesn’t own a building where you can practice, the hospital can instead offer to pay your rent – or give you the money to pay it – for the first six months. It can also buy you furniture supplies and equipment. Before, that might have endangered the hospitals tax-exempt status. Now, the IRS has conceded that a hospital with a starmednstrated need for a certain type of doctor may need to offer such inducements to attract one.
Paid liability and tail coverage. Tax-exempt hospitals have not normally been forbidden to offer malpractice insurance as part of a recruitment package, but it wasn’t specified in IRS rules. Unless the coverage was relatively inexpensive, it usually wasn’t part of the deal. Nor was tail coverage, which could run a relocating primary-care physician $20,000, and some specialists $50,000 or more.
The new IRS rules specifically state that a tax-exempt hospital can pick up the tab for both. And this applies to out-of-town doctors who are relocating and to doctors moving from one part of the city to another. But Uncle Sam says your malpractice premiums can only be paid by the hospital for a limited time – probably one to three years.
A guarantee for your home mortgage. A tax-exempt hospital can guarantee your residential mortgage – probably for two to three years – when you relocate at the hospital’s behest. Although such guarantees were possible in the past, they weren’t specified in the IRS rules and were rare. Now, as long as community need for the doctor can be proved and negotiations have been conducted at arm’s length, mortgage guarantees are specially allowed under federal policy.
Relocation assistance, if you need it. If you’re recruited from another part of the same city, the hospital can now cover moving expenses. (Before, moving expenses were sanctioned only for only for out-of-town doctors.) The hospital can also pay up to several weeks of lodging and meals while you house hunt.
An improved income guarantee. Gross-income guarantees were permitted in the past. Now your net income after expenses can be guaranteed. That, of course, makes your earnings much more predictable.
In the past, if a tax-exempt hospital was so eager to land a doctor that its deal with him broke IRS rules, that was the hospitals problem – not the physician’s. But things have changed.
“Now, if the IRS deems a recruitment package so generous that it violates the hospital’s public trust as at tax-exempt institution,” Andrew warns, “the doctor could be subject to what the agency calls, ‘intermediate sanctions.’ He can be forced to repay all -excess benefits’ to the hospital. He may also have to pay the IRS an ‘initial excise tax’ equal to 25 percent of the value of those benefits, plus other penalties.”
Say a tax-exempt hospital gives a doctor $140,000 in benefits to relocate nearby, but the tax agency decides that it shouldn’t have to pay more than $120,000. Under the new rules, the physician could have to pay $20,000 to the hospital, and $5,000 in initial excise tax to the IRS, plus other penalties. And that could happen years later, as the result of an IRS audit of the hospital’s books.
The new guidelines are subject to interpretation – by the IRS, other agencies, and ultimately the courts. So a doctor who’s considering an offer from a tax-exempt hospital should have it reviewed by an attorney familiar with health law. The lawyer will be able to determine if the deal meets the new IRS standards, if the hospital has provided enough documentation of the community’s need for the doctor, and if the deal clearly stems from true negotiation between parties – not simply from the hospital’s acceptance of terms dictated by the physician.
That last requirement is crucial for a contract to be valid in the eyes of the IRS. As John Powers notes: “Negotiating with a tax-exempt hospital shouldn’t be about the doctor getting the best possible deal. It should be about getting the best reasonable deal.”
This article was published by Cejka Search and originally appeared in Medical Economics Magazine. Copyright by Medical Economics Company Inc. at Montvale, NJ 07645. All rights reserved.