The Internal Revenue Service issued a directive on May 11, 2007 confirming that the provision of hardware and software components of electronic health records (EHR) will not constitute private inurement jeopardizing the tax exempt status of non-profit hospitals. This directive is another step forward in facilitating hospital subsidized EHR for private practice physicians.

The Centers for Medicare and Medicaid Services (CMS) and the Office of Inspector General (OIG) previously issued safe harbor regulations and Stark exceptions stating that a hospital’s provision of EHR would not be considered remuneration for fraud and abuse purposes, providing the EHR program satisfied the conditions of their rules, which included a requirement that a physician pay at least 15% of the cost of that benefit.

However, CMS and OIG rules left open the issue of whether the value of that benefit would be prohibited private inurement, i.e., benefits provided by tax exempt entities to private individuals, or excess benefits that would be subject to the intermediate sanction rules of Internal Revenue Code Section 4958, both of which are IRS issues.

The IRS directive makes it clear that the program would not jeopardize the tax exempt status of non-profit hospitals. The directive does not resolve the question of whether the value of the EHR benefit provided to private practice physicians would constitute income taxation. While commentators are making few predictions with respect to whether that value would be taxable, one can see how making that benefit taxable would raise the host of additional issues, such as the value of hospital equipment, OR space, etc., provided to private practice physicians, which would jeopardize the entire structure of private practice medical staffs.

The text of the IRS directive can be obtained as the following link: