Tax rules may stymie some hospital IT donations

Some hospitals might not be able to take advantage of new federal rules that were supposed to pave the way for them to donate health care information technology to physicians. But according to Internal Revenue Service regulations, such donations could jeopardize the hospitals' tax exemptions.

The Office of the Inspector General of the Dept. of Health and Human Services issued new rules in August that were designed to protect arrangements in which hospitals donated software, hardware and other information technology for electronic medical records and e-prescribing to physicians. The rules created exemptions from federal Stark and anti-kickback regulations that govern such relationships.

However, concerns have been raised that tax-exempt hospitals may run afoul of Internal Revenue Service rules by making such donations. That's because IRS rules say that tax-exempt entities are only supposed to make donations that have a public benefit or help them further their charitable missions. It is unclear whether donations to physicians would be construed as having a private benefit instead.

The IRS said it is considering the issue, though no formal rulings or opinions have been issued. In a prepared statement, IRS spokesman Robert Marvin said: "Since this is a newly evolving area, we are reviewing all aspects to determine whether any private benefit is prohibited or incidental to the accomplishment of charitable purposes."

When the new rules were first published, hospitals were told they would have to approach the IRS to get clarification about the effect on their exemption, said Robert Belfort, co-chair of the health care practice at Manatt, Phelps & Phillips in New York. "That left a certain amount of uncertainty among hospitals in an area that is very undefined from the IRS perspective," he said.

Belfort said he expects that hospitals will start requesting private-letter rulings from the IRS to address their concerns before moving forward with any donation plans.

But Christopher Swift, a tax and health attorney with Baker Hostetler in Cleveland, said he expects the IRS to issue what it calls a revenue ruling on the subject. Unlike a private-letter ruling, which applies only to the entity that requested it, a revenue ruling would provide broader guidance to the general population of tax-exempt hospitals.

Both Swift and Belfort said they were hopeful the IRS would find some way to reconcile its guidelines with the opportunity afforded by the new HHS rules.

Swift said the response may be influenced by what types of donations are made. Donated software for electronic medical records could arguably be seen as having a public benefit because such records would enable the physician and hospital to work together to improve the quality of patient care. But software that also includes office management functions may raise more concerns because the benefit would be largely for the physician, he said.

"I think the thought that's going to be vexing hospital counsel is that if you have a program that does both ... what's the primary purpose of that software program? That's going to be a tough question," said Swift.

The uncertainty comes at a time when nonprofit hospitals have been increasingly under the microscope by the IRS, other regulators and the public over whether they are fulfilling their charitable missions.

Belfort said that scrutiny might make it more difficult for hospitals to feel comfortable making technology donations until they get better guidance from the IRS.

"It's always possible that there's just a general skittishness about it," he said.