WASHINGTON A closing agreement with the IRS that permitted a Houston hospital to retain its tax-exempt status also allowed it to move forward last week with a delayed $161.27 million bond issue for a new wing, a lawyer for the hospital said yesterday.
The agreement, which resolved Internal Revenue Service concerns about the way Hermann Hospital recruited and retained doctors, required the 501 (c)(3) hospital to pay nearly $1 million to the service, said R. Todd Greenwalt, a lawyer with Vinson & Elkins in Houston
On Monday the IRS publicized the closing agreement, an unusual move that the agency took because the agreement contained the first-ever comprehensive physician recruitment guidelines for 501(c)(3) hospitals, Greenwalt said.
"It's safe to say the IRS wanted the closing agreement made public so these guidelines would be promulgated nationally," Greenwalt said.
The hospital delayed plans for a bond sale until after the closing agreement was finalized on Sept. 16, Greenwalt said. Last week, the hospital issued $161.27 million of tax-exempt bonds to finance the construction of additional patient facilities.
The closing agreement also preserved the tax-exempt status of $94.2 million in bonds that the hospital had outstanding, Greenwalt said.
Hermann Hospital voluntarily came forward to the IRS after realizing that some of its physician recruitment and retention practices might raise questions at the agency. After making the discovery, the hospital hired Vinson & Elkins, which worked out the closing agreement with the IRS, Greenwalt said.
The hospital's questionable practices included offering a variety of incentives to new doctors without requiring performance of specific duties in return. The incentives included free office space and parking, income guarantees, and realpractice insurance. Similar incenfives were offered to Houston-area doctors who had hospital privileges at Hermann.
In addition, Hermann Hospital ran its outpatient department with independent contractors rather than with doctors on staff, so that the department came to resemble "in certain respects the private practice office of the physicians providing services there," according to the closing agreement.
Overall, those practices "raised questions as to whether prohibited inurement and private benefit were conferred upon individuals in violation of the proscriptions of section 501(c)(3) of the code," the closing agreement states.
Under the closing agreement, the hospital paid the IRS about $993,000, which would have been the hospital's tax liability for the 1991 tax year.-had Hermann been a for-profit institution.
The hospital also agreed to abide by a set of "Hospital Physician Recruitment Guidelines" set forth in the closing agreement. They include the following:
* Elimination of so-called "retention incentives" offered by hospitals to doctors who already have privileges there.
* A prohibition against recruitment incentives for new doctors unless there is "a demonstrable community need for the physician."
* A recommendation that a hospi- hal stipulate that a doctor make certain actions in return for recruitment in, centives, such as relocating to the hospital area and accepting Medicaid patients.
* A list of permissible doctor recruitment incentives, including loans and lines of credit, and "reasonable"income guarantees and other subsidies.
