IRS: hospitals' tax exemption endangered by some joint venture - Internal Revenue Service

Healthcare Financial Management, Feb, 1992

According to recent guidance from the Internal Revenue Service (IRS), not-for-proflt hospitals could lose their tax-exempt status if they establish joint ventures with physicians that sell part of their net revenue stream to joint ventures that include as investors members of the facility's medical staff. IRS General Counsel Memorandum (GCM) 39862 withdraws approval previously granted to three joint ventures, finding that the arrangements jeopardize the hospitals' tax-exempt status because they result in private inurement, lead to private benefit that is more than incidental," and may violate the Medicare/Medicaid antifraud and abuse statute.

In addition, the GCM revises 1987 MS guidance to clarify that a hospital does not further its tax-exempt purpose by inducing or rewarding patient referrals, that a hospital may not pay physicians reasonable compensation for referrals, and that hospital activities that may be intended to induce or reward referrals must be analyzed in accordance with the guidance in GCM 39862.

Although GCMs are internal memoranda designed to provide guidance to IRS agents, the comprehensive, 38-page analysis provided in GCM 39862 is a clear indication of IRS concerns and will lead many hospitals to examine and restructure or rescind physician arrangements that resemble those disapproved by the GCM.