American Journal of Law & Medicine

Legal impediments to implementing value-based purchasing in healthcare.


The U.S. healthcare system continually confronts the challenge of controlling costs, improving quality and patient safety, and increasing or maintaining patient access to care. Payors and purchasers of healthcare (both public and private) strive to develop mechanisms to guarantee that they are purchasing the highest-value care--seeking to ensure that amounts paid take into account and provide incentives encouraging the delivery of high-quality, cost-efficient care. Through "value-based purchasing" ("VBP") strategies, healthcare payors and purchasers are transforming from passive payors of claims (as in a traditional fee for service system) to active purchasers of quality care. To date, employers, health plans, and the Centers for Medicare and Medicaid Services ("CMS") have implemented well over 100 VBP programs. (1) However, progress is slower than anticipated. As the Institute of Medicine ("IOM") and others have noted, adoption of VBP reforms may be hampered by legal barriers arising from a number of state and federal laws. (2) The goal of this paper is to identify potential state and federal legal impediments to implementing VBP in healthcare.

This paper highlights certain value-based purchasing efforts that are shaping reform of the U.S. healthcare financing and delivery system. We identify potential statutory, regulatory, and common law impediments to the widespread or efficient adoption of each promising effort. To frame the discussion, the paper is organized by tracking the "Four Cornerstones" of value-driven healthcare. The term "Four Cornerstones" was first defined by the federal government to recognize, reinforce, and facilitate the implementation of the core elements of health system reform developed by the health policy community over time. With respect to each Cornerstone, one or more quality improvement activities or initiatives are highlighted, potential legal impediments are described, and possible policy and legal solutions are identified.

This paper will examine the legal impediments to implementing each of the Four Cornerstones of value-driven healthcare. Section II provides a brief overview of the legal principles discussed in the paper, and Section III provides an introduction to the Four Cornerstones. In Section IV, we discuss legal constraints that may hinder the adoption of interoperable Health Information Technology ("HIT"), the First Cornerstone. Section V explores legal impediments to measuring and publishing information about quality, the Second Cornerstone. The Third Cornerstone--making healthcare pricing information available--is addressed in Section VI, which discusses antitrust and consumer protection-based challenges to the sharing of pricing information and cost-based provider ranking initiatives. Section VII discusses legal impediments to using incentives to promote high quality and cost effective care. In Section VIII, we discuss specific legal obstacles associated with using data gathered for quality improvement initiatives in public health research.



I. The Stark Law

The Ethics in Patient Referrals Act (the "Stark Law") (3) prohibits a physician from making referrals for certain designated health services ("DHS") for which payments may be made under the Medicare program (including inpatient and outpatient hospital services) to entities with which the physician or his immediate family has a financial relationship, unless the arrangement qualifies for one of the exceptions enumerated in the statute or its implementing regulations. The Stark Law applies to investment and compensation financial relationships, whether direct or indirect. The statute is one of strict liability, meaning if a financial relationship does not meet each element of an applicable exception, any resulting DHS referrals would constitute a per se violation of the Stark Law. A violation could result in civil penalties, and mandated return of payments received from any improper claims submitted for reimbursement to DHS.

2. The Anti-Kickback Statute

The federal anti-kickback statute (the "Anti-Kickback Statute") (4) makes it a felony for persons knowingly and willfully to solicit, receive, offer, or pay any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind, to any person, in return for or to induce such person either to refer patients for Medicare or Medicaid reimbursable services, or to arrange, recommend, or order any item or service reimbursed by Medicare or Medicaid. The statute is one of broad application, and courts have held that a violation may be found if even one purpose of an arrangement is to induce referrals. The U.S. Department of Health and Human Services ("HHS") Office of Inspector General ("OIG") has developed safe harbors to protect certain arrangements that the OIG has determined present a low risk of fraud and abuse. (5) Unlike the Stark Law, an arrangement that does not qualify for an Anti-Kickback safe harbor is not per se illegal, but rather would be evaluated based on a "facts and circumstances" analysis that takes into account various attributes of the payment arrangement to determine whether payments were made with the intent to induce referrals, and therefore are impermissible. Violations of the Anti-Kickback Statute can result in imprisonment or substantial fines. Further, the Government can exclude a physician, hospital, or other provider from participating indefinitely in the Medicare or Medicaid programs.

3. Civil Monetary Penalties Statute

The Civil Monetary Penalties Statute ("CMP Statute") (6) prohibits any hospital from knowingly making a payment directly or indirectly to a physician as an inducement to reduce or limit items or services to Medicare or Medicaid beneficiaries under the physician's care. To violate the CMP Statute, a payment need not be tied to an actual diminution in care--mere knowledge that the payment may influence the physician to reduce or limit items or services is sufficient to trigger liability under the CMP Statute. The OIG interprets the CMP Statute broadly to prohibit "any physician incentive plan that conditions hospital payments to physicians or physician groups on savings attributable to reduction in hospital costs for treatment." (7) The OIG reads the plain language of the CMP Statute to prohibit tying physician compensation to reductions or limitations in items or services provided to patients. (8)


The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") was enacted in part to protect the privacy and security of individually identifiable health information. Privacy regulations promulgated under HIPAA (collectively, the "HIPAA Privacy Rule") prevent a covered entity (9) from using or disclosing protected health information ("PHI"), (10) except as permitted or required by the regulations. (11) Covered entities include health plans, healthcare clearinghouses, and certain healthcare providers. (12) HIPAA's security regulations (the "HIPAA Security Rule") require covered entities to ensure the confidentiality, integrity, and availability of all electronic PHI the covered entity creates, receives, maintains, or transmits. (13) HIPAA also provides that a covered entity may not disclose PHI to a "business associate" (14) or allow a business associate to create or receive PHI on its behalf unless the covered entity executes a satisfactory agreement with the business associate concerning the privacy and security of PHI. (15) Violations of the HIPAA Privacy and Security Rules can result in substantial fines and criminal penalties.


Nonprofit organizations may seek federal tax-exempt status under section 501(c) of the Internal Revenue Code of 1986, as amended (the "Code"). (16) Section 501(c)(3) of the Code exempts such organizations from taxes and makes them eligible to receive tax-deductible contributions so long as they are organized and operated exclusively for, among other things, religious, charitable, scientific, or educational purposes. Section 501(c)(3) organizations are prohibited from providing any private inurement of their assets to, or conferring an excessive personal or private benefit from their activities on, any person having a personal and private interest in the activities of an organization. (17) In the case of a nonprofit hospital, an "insider" could include a physician-leader or a physician in a position to admit many patients to the hospital. (18) A corporation's tax-exempt status may be revoked if any such private inurement or excessive benefit is found. Because loss of tax-exempt status is a serious penalty, the Internal Revenue Service has also introduced a category of lesser, though still substantial, "intermediate sanctions," which are penalty taxes that may be imposed upon both the corporation's management and the individuals who received the excessive benefit. (19)


The federal antitrust laws, which include, but are not limited to, the Sherman Act, (20) the Clayton Act, (21) and the Federal Trade Commission Act, (22) are designed to benefit consumers by promoting competition, encouraging product innovation, and increasing consumer choice. They are aimed at preventing both improper "unilateral" conduct (where an organization acts on its own) (23) and "collusive" activities (where two entities agree to act in concert) (24) that interfere with the normal economic operation of supply and demand factors that would occur in a free market. Examples of improper unilateral conduct include abuse of market power and exclusionary conduct that harms a competitor or potential competitor. Examples of prohibited joint or collusive behavior include price-fixing among competitors and group boycotts (agreements among competitors to refuse to deal with another member of the industry or not to buy or sell to a particular company). Courts have held certain practices, such as price-fixing, are so restrictive of competition and so lacking in justification that they are "per se" illegal. (25) Other practices potentially implicating the antitrust laws (but not constituting per se violations) are analyzed under the more permissive "rule of reason" standard, which weighs an activity's likely procompetitive benefits against the likelihood of competitive harm. (26) The United States Department of Justice ("DOJ") and the Federal Trade Commission ("FTC") are the federal agencies with authority to bring enforcement actions to stop or prevent anticompetitive behavior. They can also prosecute individuals and corporations under certain antitrust laws and impose substantial fines. Most states also have their own antitrust laws that are enforced by state attorneys general. Private plaintiffs harmed by anticompetitive behavior may bring civil actions under certain antitrust laws.


The Deficit Reduction Act of 2005 (the "DRA"), (27) signed into law on February 8, 2006, focused on and significantly advanced Medicare value-based purchasing efforts and other private sector pay-for-performance efforts. On August 22, 2006, President Bush issued Presidential Executive Order 13410: Promoting Quality and Efficient Health Care in Federal Government Administered or Sponsored Health Care Programs (the "Executive Order"). (28) The Executive Order built upon the DRA and formalized the guiding principles of "value-driven healthcare," defining them as the "Four Cornerstones." The Executive Order applied to all federal government agencies administering or sponsoring federal healthcare programs and established directives to encourage the use of health information technology, transparency regarding healthcare quality and price, and payment incentives to promote quality and efficiency of care. In November 2007, the Secretary of HHS, Michael Leavitt, convened a group of major U.S. employers and exhorted these major purchasers of healthcare to join the federal government in supporting the Four Cornerstones of value-driven healthcare.


The First Cornerstone of value-driven healthcare is widespread adoption of interoperable HIT to facilitate, among other things, reducing medical errors, enhancing the provision of evidence-based healthcare, and increasing administrative efficiency in healthcare delivery. (29) The Government Accountability Office ("GAO") has defined HIT as "technology used to collect, store, retrieve, and transfer clinical, administrative, and financial health information electronically". (30) "Interoperable" HIT permits the sharing of electronic health information throughout the healthcare system in an accurate, effective, secure, and consistent manner, even when different information technology systems, software applications, and networks are in place. (31) For HIT systems to be interoperable, they must have at least the following two components: (i) a shared clinical vocabulary (i.e., a clinical condition must be described the same way in different HIT systems); and (ii) shared electronic data and technical standards. (32) The Executive Order requires federal agencies that are implementing or upgrading HIT systems to use technology that meets defined interoperability standards and to require, via contract, that healthcare providers, health plans and insurance issuers do the same. (33)

The $780 billion American Recovery and Reinvestment Act of 2009 ("ARRA"), which includes the Health Information Technology for Economic and Clinical Health Act (the "HITECH Act"), was intended to promote adoption of HIT by allocating approximately $20 billion for HIT projects, including $2 billion in funding to the Office of the National Coordinator for Health Information Technology ("ONC") to invest in HIT architecture supporting the nationwide electronic exchange of health information. (34) Both public and private initiatives are underway to encourage adoption of HIT, including electronic prescribing ("e-prescribing"), interoperable electronic health record ("EHR") systems, electronic care management tools, electronic quality registries, and technology tools essential to creating a patient-centered, coordinated "medical home" model of care.


The Second Cornerstone of value-driven healthcare is measuring and publishing information about healthcare quality. The Executive Order directs federal agencies to develop quality metrics in collaboration with the private and non-federal public sectors, and to measure the quality of services supplied by healthcare providers to federal healthcare program beneficiaries. (35) HHS has made quality information publicly available through its Hospital Compare website, which reports on the quality of hospitals providing services to Medicare beneficiaries, as well as by releasing an inventory of quality measures used for payment, reporting, and quality improvement by HHS operating divisions and agencies. (36) Private insurers and nonprofit organizations such as The Leapfrog Group have also developed quality metrics making healthcare provider quality information available to beneficiaries and the public. (37)


The Third Cornerstone of value-driven healthcare is measuring and publishing information about price. The Executive Order requires federal agencies to make information about the pricing information available to beneficiaries. (38) Accordingly, the CMS Hospital Compare website publishes pricing information for certain procedures under the Medicare program. (39) Private insurers are also increasingly measuring and publishing provider cost-efficiency information in efforts to direct consumers to high-value care. (40)


The Fourth Cornerstone of value-driven healthcare is adopting incentives to promote high-quality and cost-effective care. The Executive Order recommends "pay for performance" ("P4P") models of reimbursement. (41) P4P initiatives, which tie payment for healthcare services to achievement of metrics or outcomes, are at the core of many public and private VBP reform efforts. The DRA directed CMS to issue a P4P plan for Medicare hospital services paid under the Inpatient Prospective Payment System ("IPPS") for implementation beginning in fiscal year 2009. (42) Although CMS fulfilled its legislative mandate by issuing its report to Congress in November, 2007, CMS's hospital VBP plan requires statutory authorization that has not yet been accomplished. (43) In addition, the Medicare Improvements for Patients and Providers Act of 2008 required HHS to develop a plan to transition physician and other professional services to VBP. (44) CMS in turn issued its "roadmap" to Congress in January, 2009. (45) CMS has also announced several Medicare demonstration projects that will test whether physician-hospital gainsharing can reduce costs while improving quality. (46) P4P programs are also becoming increasingly common in the private sector. (47)



In recent years, the federal government has played a significant role in leading the development of various processes and standards to promote widespread adoption of interoperable HIT in the public and private sectors. The Office of the National Coordinator for Information Technology ("ONC") has emerged as the key strategic driver in this arena. (48) In June 2008, HHS issued the ONC-Coordinated Federal Health IT Strategic Plan: 2008-2012, which set forth strategic goals to improve patient care, public health, research, and emergency preparedness, accompanied by privacy and security objectives including developing a privacy and security framework and addressing inconsistent legal requirements. (49) Passage of ARRA in the early days of the Obama administration carried this effort further by committing $2 billion in federal funding to the ONC to invest in HIT architecture supporting the nationwide electronic exchange of health information. To achieve this goal, ARRA created a Health Information Technology Extension Program, including a national Health Information Technology Research Center and Health Information Technology Regional Extension Centers, to assist providers in adopting, implementing, and effectively using HIT. The regional centers will provide technical assistance to all providers with priority given to various entities, including public or non-profit hospitals and providers that are located in areas that serve uninsured, underinsured, and medically underserved individuals. (50)

The American Health Information Community ("AHIC"), a federal advisory body chartered in 2005 to make recommendations to the Secretary of HHS on how to accelerate the development and adoption of HIT, originally assisted ONC with developing voluntary interoperability standards for HIT. (51) AHIC's responsibilities were to have been assumed by a successor organization, the National eHealth Collaborative ("NeHC"). NeHC, a public/private partnership, was intended to leverage broad stakeholder support to develop voluntary interoperability standards and generally advance the widespread implementation of HIT. (52) Although NeHC convened for the first time on November 14, 2008, ARRA removed NeHC as the lead HIT advisory board to the ONC and instead established two new federal advisory boards--an HIT Policy Committee and an HIT Standards Committee--to formulate policy and standards recommendations to improve HIT and expand its use. (53) ARRA requires the ONC to coordinate with the National Institute of Standards and Technology ("NIST") to develop a certification program for assessing compliance with endorsed standards for HIT. Under the law, the ONC must adopt HIT certification standards, and NIST is required to develop testing criteria and new infrastructure to test the adopted standards.

Under the umbrella of its value-driven healthcare initiative and the leadership of the ONC, HHS has engaged the private sector in initiatives to develop health information technology certification mechanisms, data and technical standards, and a nationwide health information network ("NHIN"). The Certification Commission for Healthcare Information Technology ("CCHIT") was awarded a contract by HHS to develop an interoperability certification program for inpatient and outpatient EHR software and network systems. (54) The ONC also convened a public/private panel called the Health Information Technology Standards Panel ("HITSP") to identify and harmonize data and technical standards for healthcare. (55) Under ARRA, the ONC may choose to adopt standards established by either CCHIT or HITSP for its certification program. Other collaborative HIT efforts include the Health Information Security and Privacy Collaboration, the State Alliance for e-Health, and the State-Level Health Information Exchange Consensus Project. (56) ARRA also charges NIST with creating multidisciplinary Centers for Health Care Information Integration through contracts with universities and federal laboratories.

Public and private payors are also implementing payment mechanisms rewarding hospitals and physicians for using interoperable EHR. (57) The National Quality Forum has endorsed nine new national voluntary consensus standards for HIT in the areas of e-prescribing, EHR interoperability, care management, quality registries, and the "medical home" model of healthcare. (58) These standards expressly link interoperable HIT use to improved quality of care and care management by promoting not only adoption of e-prescribing technologies and EHRs, but also mechanisms to increase care coordination and deliver continuous, patient-centered care through the medical home model. CMS is currently conducting a five-year demonstration project designed to encourage small to medium-sized physician practices to adopt EHR systems that have been certified by CCHIT for interoperability. (59) Under the demonstration project, physician practices receive incentive payments for using CCHIT-certified EHR systems to meet designated clinical quality measures. (60) Qualified participants will receive incentive payments of up to $58,000 per practitioner over the five-year demonstration period (capped at $290,000 per participating practice). (61) CMS is also pursuing initiatives to encourage patients to embrace HIT. In November 2008, HHS announced a new pilot program that will allow Medicare beneficiaries in Arizona and Utah to use software from one of four private vendors to create and transmit personal electronic health records. (62)

ARRA includes substantial incentive payments for hospitals, physicians, and certain other health care professionals to adopt HIT--and also imposes penalties on providers who fail to do so. (63) The incentive payments will be distributed through both Medicare and Medicaid. Medicare incentive payments will begin in 2011, and providers failing to adopt HIT by 2015 will be subject to a payment penalty. (64) Medicaid incentive payments may begin as soon as states set up appropriate payment mechanisms (but no later than 2016), and each provider may receive up to six years of payments. Although Medicaid payments should be available to assist providers in initially purchasing and implementing HIT, (65) on the Medicare side, providers must demonstrate that they are "meaningful EHR users" in order to receive initial Medicare incentive payments beginning in 2011. (66) The HIT Policy Committee has convened a Meaningful Use Workgroup to develop "meaningful use" standards, which are projected to be developed over a multi-quarter period and rolled out in late 2010 in time for the initial 2011 payments. (67)

ARRA is likely to spur or facilitate state efforts and initiatives to promote the adoption of EHRs and the implementation of interoperable HIT. For example, the non-profit Massachusetts e-Health Collaborative (the "Collaborative") developed a pilot project to implement Community Data Repositories ("CDRs") in three Massachusetts communities. (68) The Collaborative furnished physicians in each community with an EHR system that exchanges patient data with that community's CDR. Also, an August, 2008, Massachusetts law mandates that the Massachusetts e-Health Institute (the "Institute"), a public entity, deploy EHR systems in all health care provider settings and link these EHR systems with a statewide health information exchange by January 1, 2015. (69) In Minnesota, state law requires all Minnesota health care providers to begin using an interoperable EHR system by 2015. (70) Minnesota recently awarded $3.5 million in grants to rural hospitals, nursing homes, and other small health care providers to support the adoption and implementation of interoperable EHR systems. (71) The state is also offering no-interest loans to help providers adopt EHR systems. (72)

Notwithstanding the significant progress these public and private collaborations have achieved in developing a strong framework and standards for adoption of interoperable HIT, impediments to the widespread adoption of HIT technologies remain. ONC serves as an advisory body to the federal government, and because it cannot mandate implementation of HIT in the private sector, its efforts to facilitate widespread adoption are limited by legal and policy considerations. For example, ONC's plan to develop NHIN relies in part on connecting established regional organizations ("regional health information organizations" or "RHIOs") that share electronic health information across provider networks. (73) Yet a recent survey of 145 RHIOs in the U.S. found that only 20 were "of at least modest size and exchanging clinical data." (74) Such modest progress may be due, in part, to the legal impediments confronted by RHIOs and other health information exchange collaborations, (75) such as: fraud and abuse, antitrust, federal income tax, and privacy and security laws and regulations.


1. Fraud and Abuse Laws

a. The Stark Law

The Stark Law may present a barrier to the widespread adoption of HIT by dissuading hospitals and other entities that furnish DHS from donating interoperable HIT items and services to physicians, for whom such items and services would otherwise be cost-prohibitive. For example, to ensure interoperability, a hospital upgrading its HIT systems may wish to donate new EHR or e-prescribing software and training services to physician-members of its medical staff. This could result in Stark Law violations if the donation is deemed to create an impermissible financial relationship. Recognizing this, in 2004 CMS developed an exception under the Stark Law to permit donations of HIT items and services to physicians in order to facilitate "community-wide health information systems." (76) Unfortunately, the exception was of limited use because: (i) CMS did not define "community-wide health information systems"; (ii) the regulation required that community-wide health information systems be made available to providers and residents in the community, raising privacy concerns and practical barriers; and (iii) there was no parallel safe harbor under the Anti-Kickback Statute. (77) As a result, CMS and the HHS OIG revisited the issue two years later, in 2006, issuing two new HIT-related exceptions: (78)

i. E-Prescribing Exception: (79)

This exception allows donations of items and services in the form of hardware, software, or information technology and training services that are necessary and used solely to receive and transmit electronic prescription information. If such items or services will be used for any purpose other than e-prescribing, the donation does not fit within the exception. The exception also requires that the donation be from a group practice to one of its physicians or from a hospital to a medical staff physician.

ii. Electronic Health Record Exception: (80)

This exception covers donations of any interoperable technology that is necessary, and used predominantly, to create, maintain, transmit, or receive EHR. The EHR technology must be interoperable such that communication with a broad range of IT systems (and not just that of the donating hospital) is possible. Donated technology may include internet connectivity, software, and information technology training services, but not hardware, storage devices, or the provision of information technology staff. Physician recipients must pay 15 percent of the donor's cost for technology and services. This exception sunsets on December 31, 2013. (81)

Both exceptions prohibit selection of recipients using any method that takes into account the volume or value of referrals from the recipient or business generated between the parties. However, the exceptions do permit more indirect physician alignment strategies, such as donating HIT to physician members of organizations that are affiliated with the donor hospital.

Although these new exceptions give some latitude to DHS entities to assist physicians with implementing interoperable HIT, they do not completely remove Stark Law barriers. First, the exceptions do not cover donations of certain key resources for implementing interoperable HIT, such as staff to transfer existing paper records to an electronic format, or hardware for EHR. Second, potential donors may have difficulty determining whether a proposed donation would meet the regulatory requirements of an exception, as the requirements are complex and may require technical knowledge. For example, donations are not covered if a donor "knows that the physician already possesses equivalent items and services, or acts in reckless disregard of that fact." (82) Donors thus, may be wary of donating HIT if there is uncertainty whether the physician's existing HIT is technically "equivalent" to the proposed donation. Third, even if a hospital donor could structure a donation to comply with an HIT-related exception, the donation could still violate state-level physician self referral laws ("mini-Stark" laws). (83) Fourth, physician-recipients may not be willing or able to pay 15 percent of the cost of the donated technology and services, plus all hardware costs, as required to comply with the EHR exception. Indeed, a recent study by the Center for Studying Health System Change, which involved site visits to 24 hospitals in 12 nationally representative metropolitan communities, found the exceptions have had only modest impact, as the burden of other hospital information technology projects, budget limitations, and lack of physician interest have impeded hospital efforts to help physicians purchase EHRs. (84)

b. The Anti-Kickback Statute

Because a donation of HIT to a physician or other healthcare provider could be considered "remuneration" to that healthcare provider, a donation could result in liability under the Anti-Kickback Statute, to the extent the donation is viewed as being given in exchange for referrals for federally reimbursable health services. In 2006, the OIG addressed this concern by adding safe harbors to permit certain donations to physicians of items and services that facilitate e-prescribing and EHR. (85) These safe harbors are nearly identical to the Stark Law exceptions. As with the Stark Law exceptions, potential donors and recipients may have difficulty structuring HIT donations to fit within these safe harbors due to the detailed, technical nature of the requirements. Moreover, the exceptions are of limited use to potential donors and recipients in states with more restrictive state anti-kickback laws, since these federal safe harbors do not preempt contradictory state law provisions. (86)

2. Federal Income Tax Law

Tax-exempt hospitals considering donating HIT-related items and services to a physician must consider the federal tax laws when structuring such arrangements. In 2007, the IRS issued a "field memorandum" (87) and question and answer document (88) for hospitals seeking to donate HIT-related items and services to medical staff physicians. The guidance states that a tax-exempt hospital's donation of HIT-related items and services (a "Health IT Subsidy") to physicians with staff privileges would not give rise to impermissible private benefit or private inurement as long as the donation meets the following requirements: (i) the Health IT Subsidy cannot take the form of a cash payment, but must take the form of a donation of e-prescribing or EHR-related software or information technology and training services; (ii) the Health IT Subsidy must comply with an HIT-related Stark Law exception and Anti-Kickback Statute safe harbor; (iii) the Health IT Subsidy arrangement must specify that, to the extent permitted by law, the hospital is permitted to access all EHRs created pursuant to the Health IT Subsidy; (89) (iv) the hospital must make the e-prescribing and/or EHR support available to all of its medical staff physicians (although access may be phased in based on community need); and (v) either the same level of subsidy must be provided to all medical staff physicians, or the level of subsidy may only vary based on criteria related to addressing community need. Arrangements that do not meet the requirements of the Health IT Subsidy safe harbor will be examined on a case-by-case basis. Hospitals that are unable to satisfy the safe harbor are unlikely to lose tax-exempt status so long as the subsidy arrangements have a rational basis, although intermediate sanctions may be imposed if, under a facts-and-circumstances analysis, the arrangement results in impermissible private inurement or private benefit.

While this guidance makes clear that tax-exempt hospitals may permissibly assist staff physicians to acquire and implement interoperable HIT, it does not address whether the IRS will view a subsidy for e-prescribing or EHR support as taxable income for the recipient physicians. …

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