This is a general discussion of issues raised when a hospital pays a doctor to stay in an area for a specified period of time by means of issuing a loan and then
forgives the loan and issues 1099's to the doctor after a certain period of time. A hospital does this for many reasons including a desire to improve medical care in a community, to bring needed services or to bring in loyal
physicians who will refer business (patients) to the hospital. This discussion is necessarily limited to general federal law. State and local laws may also affect the validity of this transaction. The practice may be valid or
may violate certain federal laws depending on a variety of factors such as the tax exempt status of the hospital. The description of the area in which the physician practices as a rural area, health professional shortage area, or
other also affects the validity of this practice for evaluation under various federal statutes.
Tax Exempt Status
Hospitals which are tax exempt under Section 501(c)(3) of the Internal Revenue Code are potentially in
violation of that status when they make unwarranted payments to a physician. Loans at fair market value might not violate these rules. Forgiveness of such loans may be a violation of a charitable status and probably also require
income tax recoginition on the part of the doctor. The rules regarding this are found in the rules and regulations regarding Section 501 (c)(3) of the Tax Code. Some narrow exceptions have been granted including forgiveness of
loans or below market loans made by hospitals to physicians who are becoming established in a rural area or other area in which the community lacks a type of medical service or lacks sufficient medical services.
In order to know
whether those limited exceptions apply you would need to know the current level and scope of medical services available, whether a shortage of those services exists, and whether this is a rural area, a medically under-served area, a
health professional shortage area, or other such area. Requirements regarding the length of the physician's obligation to remain in the area, a loan obligation in writing, and other rules apply.
Intermediate Tax Sanctions
In addition, recent legislation imposes tax penalties on a physician who receives "excess benefits" which are not otherwise authorized. These tax penalties are referred to as intermediate sanctions because these may be
imposed as a less drastic measure than removing the tax exempt status of the facility. The physician may be required to pay up to 200% of the value received in transactions which are not at fair market value. Hospital board members
and officers may be required to pay up to 10% of such transactions in tax. This tax would be in addition to any restitution required. The statute does not reference the "safe harbors" for bringing physicians to a
medically underserved area; however, that rule would seem to apply.
Medicare/Medicade
In addition to tax consequences, the payment of amounts to a physician for improper reasons may be a violation of certain Medicare and
Medicaid statutes. These include 42 U.S.C. Sec. 1320a-7b(b) and 42 U.S.C. Sec. 1395.
The first of these penalizes hospitals and physicians which engage in the practice of giving and receiving kickbacks for referrals. If no safe
harbor applies, a hospital may not provide money to a physician for referring patients to the hospital.
A safe harbor, basically as described for tax concerns, applies when the hospital extends a loan to bring a needed physician
to an underserved community.
The second Medicare concern is the so-called Stark II law. This law prohibits, among other things, a physician from making referrals to a hospital if the physician and hospital have a financial
relationship which is not in a safe harbor set out in the statute.
Other Laws
This article only addresses certain federal laws which could be implicated by this practice. Depending on all the facts, other federal laws
could be implicated. These may include antitrust, FICO, false claims, and others. In addition, a member of state and local laws may also be violated by certain types of payments between a hospital and a physician.
