WASHINGTON -- The Internal Revenue Service is being urged to take into account current billing practices when revising its guidelines that determine whether contracts between hospitals and physicians are private loans that might prevent the tax-exempt financing of hospital facilities and equipment.
Paul G. Gebhard, a lawyer with Jenner & Block in Chicago, told the IRS in a recent letter that the 1982 revenue procedures should be revised to take into account new billing practices between hospitals and private physicians. The practices have evolved over the past decade from changes made to the Medicare program, the federal system that provides medicall insurance to people over 65 years of age.
Mr. Gebhard represents the American College of Radiology, which has more than 22,000 physicians as members. But he said this issue affects all private doctors who have arrangements with hospitals under which they provide services in return for the use of hospital facilities and equipment.
According to Mr. Gebhard, IRS revenue procedures 82-14 and 82-15 reflect billing practices no longer used to any great extent. Under these rules, contracts between hospitals and private physicians that allow the physicians to use hospital facilities and equipment in return for services would not be considered a private loan under the tax laws if certain conditions are met.
One of those conditions requires that a percentage fee contract -- an arrangement in which the hospital gives a percentages of the fees it charges to a private physician -- contain a provision allowing the hospital to cancel the contract with 90 days' notice.
Another condition requires that a periodic flat fee contract -- one in which a hospital periodically pays a physician a specified portion of the fees it charges -- contain a provision allowing the hospital to cancel the contract at the end of a two-year period.
"But these kinds of contracts have almost disappeared now because of Medicare requirements," Mr. Gebhard said yesterday. Under Medicare, separate billing arrangements have become common, under which private physicians bill individual patients for their services.
This system evolved because of changes to the Medicare program under which the federal government pays the hospital a flat rate for each diagnosis. If the hospital can provide care for less than that amount, it gets to keep the difference. If the care the hospital provides costs more than the amount the federal government is willing to pay, the hospital must make up the difference.
Because of the pressures from Medicare to keep costs down, hospitals have been letting private physicians bill patients directly.
Mr. Gebhard is urging the IRS to take these new billing procedures into account so the contracts or agreements are not deemed to be a private loan under the tax laws. If they were considered a private loan, tax-exempt bonds could not be used to finance the hospital facilities and equipment.
Under the tax laws, bonds are private-activity bonds and not tax-exempt -- unless specifically authorized as tax-exempt under the tax laws -- if the lesser of more than 5% or $5 million is lent to private individuals. Bonds also would be private-activity bonds if more than 10% of the proceeds are used directly or indirectly in a private trade or business and more than 10% of the principal or interest is derived from private payments.
"We are very concerned that if the [IRS] merely 'updates' the old revenue procedures without considering the changes in medical business practice agreements in the last decade, it will do a grat disservice to the medical community, both tax-exempt hospitals and non-exempt physician groups," Mr. Gebhard said in his letter.
