IRS blesses EHR subsidies by hospitals

May 25, 2007

After a long pause, the IRS has finally ruled that not-for-profit hospitals can help physicians on their staffs acquire EHRs without endangering their tax exemptions. While not identical to the wording of the government's Stark and anti-kickback-law exceptions, the IRS guidance covers the same items and services. But whether many hospitals will now move to subsidize physician purchases of EHR systems is still an open question.

After a long pause, the IRS has finally ruled that not-for-profit hospitals can help physicians on their staffs acquire EHRs without endangering their tax exemptions. While not identical to the wording of the government's Stark and anti-kickback-law exceptions, the IRS guidance covers the same items and services. But whether many hospitals will now move to subsidize physician purchases of EHR systems is still an open question.

"A lot of people were saying they weren't going to move forward without an IRS ruling," notes Erica Drazen, a consultant with First Consulting Group in Lexington, MA. "However, there's a huge barrier remaining, and that's cost. So you can do this, but you still have to be able to afford it. The hospital has to be able to subsidize, and the doctors have to be able to do the rest. And there's a pretty large gap between what physicians are willing to pay and what systems cost. So there's a pretty big subsidy that will be required."

How big a subsidy? One early indication comes from Premier Health Partners, a hospital system in Dayton, OH, that's offering community physicians its Epic EHR. According to Nikki Clancy, a spokesperson for Premier, the organization is subsidizing only 15 percent of the cost, "and we're still losing money at 15 percent." Nevertheless, the EHR will cost each physician nearly $1,000 a month, she says. While the healthcare system hopes to bring on 500 doctors over the next couple of years, Clancy admits that the EHR is still too expensive for most practices.

Most doctors, Drazen notes, aren't willing or able to spend more than about $250 a month for an EHR. Although the Stark exception permits hospitals to donate up to 85 percent of the value of EHR software, Drazen hasn't heard of any hospital offering or considering the donation of more than 50 percent—and that doesn't include the cost of hardware or implementation. So it's going to be hard for many physicians to take advantage of hospital largesse, where it exists.

While the IRS ruling has removed one obstacle, it has added another. The guidance states that a hospital that subsidizes EHRs has to offer them to all of their staff physicians. Moreover, it must "provide the same level of subsidy to all of its medical staff physicians" unless it can show that favoring some physicians over others will help meet the healthcare needs of the community.

Previously, an FCG report suggested that donor hospitals could use selection criteria such as the total volume or size of a practice, its current use of technology, or its level of uncompensated care. While a hospital still might be able to give more to a public clinic, Drazen says, it's unclear what else might pass the "sniff" test. Hence the same lawyers who urged caution in the absence of IRS guidance might say that nothing has changed, she adds. Meanwhile, it's unlikely that hospitals are going to subsidize their entire staffs.

The bottom line? The IRS ruling "isn't going to create a landslide," says Drazen. "Money will create a landslide."