IRS ruling opens door for hospitals to donate IT to physicians

Unanswered are questions about physician control of the data and systems and what doctors' tax responsibilities will be.

By Carolina Procter — Posted June 11, 2007

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A recent Internal Revenue Service ruling that allows nonprofit hospitals to donate health care information technology to physicians means that private practices can expect to start hearing from those hospitals, says the American Hospital Assn.

Hospitals had been itching to share their electronic medical record and electronic prescribing systems with physician offices, and now they can do so without losing their tax-exempt status. The Office of Inspector General of the Dept. of Health and Human Services in August 2006 created exemptions from federal, state and anti-kickback regulations for hospitals donating technology to doctors.

But before accepting an offer, physicians should first make sure that they can help choose the EMR or e-prescribing system they receive, and verify that their patients' privacy won't be compromised, observers say. Physicians also should be aware that the ruling, because it's new, has left some questions unanswered -- particularly whether they can keep the EMR if they sever ties with the hospital and whether they have to pay taxes on it.

The IRS previously had said tax-exempt hospitals could make donations that resulted in a public benefit, but it was unclear whether giving to private physicians qualified. On May 11, the IRS said it did.

"This was one of the regulatory barriers that stood in [a hospital's] way in terms of EHRs and [the hospital's] relationship with physicians," said Lawrence Hughes, the AHA's regulatory counsel.

Among them is Texas Health Resources, a nonprofit system of 13 hospitals in north Texas. The system is in the process of implementing an EMR and wanted to add a "piece that would reach out to physician groups and practices," said Elaine Anderson, Texas Health's senior vice president for tax and compliance.

Now, "the hesitancy is gone," said John Mitchell, Texas Health's vice president of tax management.

The American Medical Association supports IT-related financial assistance from inpatient facilities if it doesn't "constrain the physician's choice of which ambulatory HIT system to purchase" and if it promotes "voluntary rather than mandatory sharing" of health records, according to AMA policy.

The IRS ruling, however, says "the hospital may access all of the electronic medical records created by a physician using the [health IT] subsidized by the hospital."

AMA Trustee Joseph Heyman, MD, an obstetrician-gynecologist and EMR owner in Amesbury, Mass., said physicians should make sure that they can take the electronic medical records with them if they ever sever ties with the hospital.

"They don't want to become prisoners of the hospital that's providing them with the services," he said.

But it's unclear whether physicians will have that freedom. Jack Malloy, the principal solutions architect for the Henry Ford Health System in Detroit, said his organization has not decided whether departing physicians can keep a donated EMR.

"We don't know the answer to that one yet, since we haven't gone through it," he said. "That would have to be negotiated."

Mitchell, of Texas Health, said he thinks physicians could keep the EMR because "this isn't about connecting the doctors to the hospitals. This is about equipping them with an EMR that can foster the health exchanges everyone's trying to get done."

Malloy said physicians who don't want to use Henry Ford's EMR can buy their own, and the hospital system will "provide them a way to share the data." However, the physician would have to pay interoperability costs.

Texas Health Resources intends to offer physicians a choice of multiple EMRs as a way around this, Mitchell said.

"We know that one size won't fit all," he said. "There's too many differences in physician medical practices to make a single vendor work."

Experts say physician shouldn't wait for a hospital to pick out a technology vendor before assessing an offer. Gary Van House, managing director of Chicago-based Wellspring Partners, a physician group consulting firm, said physicians should ask to be part of the selection process.

"Hospitals are hospital-centric and physicians are physician-centric. If one selects for the other, it doesn't work," Van House said. "But I tell doctors you absolutely need to move in this direction. We absolutely need the ability to exchange medical information electronically."

Betsy Nicoletti, owner of Medical Practice Consulting in Springfield, Vt., said physicians can take comfort in the fact that it's in hospitals' best interest to offer EMRs that work well for physician offices.

"They have so much investment in keeping their physicians committed to them that I think they're exhibiting cooperative behaviors in their selection process," she said. "I don't see that as a huge issue."

Nicoletti also said that if physicians have the choice between accepting a hospital's EMR or selecting their own, they should accept the hospital's. "If they take the donation from the hospital, then the hospital has more ownership in making it work when there's troubleshooting," she said. "They're adding financial and operational risk when they select a program that doesn't interact as easily with their hospital."

And what happens at tax time? Do physicians pay taxes on a donated EMR? The IRS isn't sure.

"Our directive doesn't address that question," said Stephen Clarke, who works in the IRS exempt organizations division. Nor does the directive address whether a hospital can ask a departing physician to reimburse it for the donated EMR.

Clarke said a physician could get answers to tax questions by requesting a private letter ruling from the IRS chief counsel's office.

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