On May 11, 2007, the Internal Revenue Service issued a memorandum reassuring tax-exempt hospitals and health care organizations (“hospitals”) that provided they structure health information technology subsidy arrangements with staff physicians properly within certain U.S. Department of Health and Human Services (“HHS”) regulations and operate in accordance with certain guidelines, they will not run afoul of the proscriptions against impermissible private benefit or inurement under section 501(c)(3).

This guidance comes in response to HHS regulations issued on August 8, 2006, which provide an exception to the physician self-referral statute and a safe harbor under the anti-kickback statute for subsidizing the costs of certain health information technology (“IT”) items and services toward the adoption of electronic health records and e-prescribing. The HHS regulations specifically require that physicians share the costs of purchasing and using the health IT items received. Physicians must pay at least 15% of the costs of certain identified health IT items and services before the physician receives any of the items or services. Furthermore, the regulations do not permit hospitals or related parties to finance, including through loans to the physician, any portion of a physician’s share of the costs.

Under the HHS regulations, permissible subsidized health IT items and services include software, interfaces, connectivity services, training, and help-desk and other types of maintenance and support services. Hospitals are not permitted to donate or subsidize the costs of hardware or staffing for physicians’ offices. Subsidized health IT items and services cannot duplicate what the physician already has and must contain electronic prescribing capability, either through a direct prescribing component or an electronic interface with the physician’s existing prescribing system. The HHS regulations explicitly require that subsidized health IT items and services be “necessary and used predominantly to create, maintain, transmit, or receive electronic health records;” therefore, such items and services may not be used “primarily to conduct personal business or business unrelated to the physician’s medical practice.”

In addition to directing that benefits fall within the range of health IT items and services that are permissible under the HHS regulations, in its memorandum, the IRS also directs that hospitals operate in accordance with certain guidelines in providing such benefits. To that end, the IRS set forth the following guidelines:

1. Health IT Subsidy Arrangements. Hospitals enter into health IT subsidy agreements with medical staff physicians for the provision of health IT items and services at a discount (“Health IT Subsidy Arrangements”).

2. Compliance with HHS Regulations. Health IT Subsidy Arrangements require both the hospital and the participating physicians to comply with the HHS regulations on a continuing basis.

3. Hospitals’ Access to Records. Health IT Subsidy Arrangements provide that, to the extent permitted by law, the hospital may access all of the electronic medical records created by a physician using the health IT items and services subsidized by the hospital.

4. Physician Participation. Hospitals ensure that health IT items and services are available to all of its medical staff physicians. Clearly, the schedule for physician participation would be determined by the hospital according to the healthcare needs of the community.

5. Uniform Agreements Among Physicians. Hospitals provide the same level of subsidy to all of its medical staff physicians or vary the level of subsidy by applying criteria related to meeting the health care needs of the community.

This directive should allay any concerns that hospitals may have in implementing health IT arrangements with physicians. In implementing a health IT system, hospitals will want to structure Health IT Subsidy Arrangements with physicians in accordance with the guidelines the IRS has set forth in the memorandum.