IRS Continues to Defend 20 Percent MD Staff Limit on Hospital Boards

The IRS, responding to pointed questioning by the American Bar Association of the rationale for a 20 percent limit on medical staff representation for tax-exempt hospitals, says the rule was established to prevent conflicts of interest between physicians who view the hospital as a place of business and the intent of the public support test in Section 509(a) of the Internal Revenue Code and Section 1.170A-9(e) (1) of the Treasury Regulations.

According to a senior IRS official speaking at an ABA health forum in New Orleans last fall, the Service came up with the 20 percent limitation to keep the profit motive of physicians who sit on hospital boards "far enough away" from the charitable purposes of the hospital.

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Physicians "who see the hospital as a place of business" don't have charity uppermost in their minds, said the official, a technical aid working for the IRS Chief Counsel for Employee Benefits and Exempt Organizations.

"Any director at any time may have a conflict of interest," she said, and the IRS has never questioned the business judgment of hospitals using physician expertise on their boards. The difficulty is inherent in their "dual role," she said. A physician using a tax-exempt organization as a place of business while sitting on it's board is placed in an "impossible situation."

Joint operating agreements also get IRS scrutiny

Joint operating agreements (JOA) among tax-exempt hospitals is another area of IRS concern according to the official. "We want to be sure the involved entities do a better job of promoting community health after JOAs go into effect than they did before; that they aren't just enjoying the tax advantages," she said. She listed three criteria JOA partners must meet to remain tax-exempt:

"Seamless" services must be maintained so individuals being cared for by one party to the agreement can receive care from the other."Financial integration" to avoid profit incentives that would cause the entity to fail the public support test.All partners must have "legal liability with respect to patients."

This article is based on copyrighted information from the Daily Tax Report, No. 203, page G-9, published by the Bureau of National Affairs, Washington, D.C. 20037

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Posted in Internet Post Date 07/12/2021






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