SEHARUSNYA INSENTIF
The IRS explains that it has generally considered twelve (12) issues in determining whether physician incentive compensation arrangements violate the proscriptions against private incurement and impermissible private benefit. These twelve (12) factors are:
1. Independent Board of Directors and Conflicts of Interest Policy. Was the compensation arrangement established by an independent board of directors or by an independent compensation committee? Whether the hospital has an independent community board of directors is a significant factor in determining whether the hospital is meeting the community benefit standard. Further, adoption by the board of a substantial conflicts of interest policy is important. The IRS explained that the conflicts of interest policy should restrict a physician who is a voting member of the board and who receives compensation from the hospital from discussing and voting on matters pertaining to that physician’s compensation. The conflicts of interest policy should also bar physicians from membership on the hospital’s compensation committee and should preclude any
voting member of the compensation committee from voting on matters pertaining to that member’s compensation.
2. Reasonable Compensation. Does the compensation arrangement with the physician result in total compensation that is reasonable? Reasonableness of physician compensation is a fundamental factor in whether incentive compensation will be deemed to violate the proscriptions against private inurement and impermissible private benefit. The information letter cites reliable physician compensation survey data for physician specialty and geographic locale as helpful in establishing reasonableness.
3. Arm’s Length Relationship. Is there an arm’s length relationship between the hospital and the physician, or does the physician participate impermissibly in the management or control of the organization in a manner that affects the compensation arrangement? This factor is similar to the need for a conflicts of interest policy (and ideally an arm’s length relationship will be ensured by such a conflicts of interest policy).
4. Ceiling. Does the compensation arrangement include a ceiling or reasonable maximum on the amount the physician may earn to protect against projection errors or substantial windfall benefits? This factor helps demonstrate reasonableness by showing a maximum amount the physician can earn under the incentive compensation arrangement.
5. Reduction in Charitable Programs. Does the compensation arrangement have the potential for reducing the charitable services or benefits that the hospital would otherwise provide? The information letter provides no further guidance on this factor other than the question. Certainly, compensation arrangements that reduce charitable services or public benefits are going to be disfavored by the IRS.
6. Quality of Care and Patient Satisfaction. Does the compensation arrangement take into account data that measures quality of care and patient satisfaction? Advancing quality of care and patient satisfaction are substantial factors favoring the incentive compensation arrangement.
7. Net Revenue Based. If the amount a physician earns under the compensation arrangement depends on net revenues, does the arrangement accomplish the exempt hospital’s charitable purposes, such as keeping actual expenses within budgeted amounts, where expenses determine the amounts the hospital charges for charitable services? This factor only applies when the compensation arrangement is based on net revenues. If so, the IRS will look to see that the net revenue based compensation arrangement does not create an incentive to increase charges for charitable services.
8. Joint Venture. Does the compensation arrangement transform the principal activity of the hospital into a joint venture between it and the physician or a group of physicians? This factor seeks to ensure that an incentive compensation arrangement is merely reasonable compensation and not a joint venture.
9. Distribution of Profits. Is the compensation arrangement merely a device to distribute all or a portion of the exempt hospital’s profits to the persons who are in
control of the hospital? This factor also seeks to ensure that an incentive compensation arrangement is merely reasonable compensation and not an improper distribution of the profits of the hospital.
10. Business Purpose. Does the compensation arrangement serve a real and discernible business purpose of the exempt hospital, such as to achieve maximum efficiency and economy in operations that is independent of any purpose to operate the exempt hospital for the impermissible direct or indirect benefit of the physicians? Meeting a legitimate business purpose of the exempt hospital is a significant factor favoring an incentive compensation arrangement. Without such a business purpose it will be difficult to justify an incentive compensation arrangement.
11. Abuse or Unwarranted Benefits. Does the compensation arrangement avoid potentially abusive or unwarranted benefits because, for example, prices and operating costs compare favorably with those of other similar organizations? The information letter explains that this factor may be met by including effective controls to avoid increases in compensation predicated on increases in fees charged to patients. Also important, the IRS notes, are effective controls to guard against unnecessary utilization.
12. Services Personally Performed. Does the compensation arrangement reward the physician based on services the physician actually performs, or is it based on performance in an area where the physician performs no significant functions? This factor goes to the reasonableness of the incentive compensation arrangement. In order to be permissible, the incentive compensation should only be related to actual services performed by the physician.
The IRS concludes the information letter by stating that there is no prohibition or per se rule that prevents exempt hospitals from making incentive payments to physicians. Determinations by the IRS of whether an incentive compensation program for physicians complies with the proscriptions against private inurement and impermissible private benefit will be based on an analysis of these twelve (12) factors.
The IRS information is useful not only for physician incentive compensation arrangements, but also as general guidelines in structuring all hospital-physician relationships. It is important to note, however, that these are only IRS guidelines and any hospital-physician relationship must also be reviewed for compliance with other regulatory programs (e.g., Stark, fraud and abuse, etc.). With respect to physician incentive compensation, the Department of Health and Human Services Office of the Inspector General advisory opinions on gain sharing must also be considered.
1. Independent Board of Directors and Conflicts of Interest Policy. Was the compensation arrangement established by an independent board of directors or by an independent compensation committee? Whether the hospital has an independent community board of directors is a significant factor in determining whether the hospital is meeting the community benefit standard. Further, adoption by the board of a substantial conflicts of interest policy is important. The IRS explained that the conflicts of interest policy should restrict a physician who is a voting member of the board and who receives compensation from the hospital from discussing and voting on matters pertaining to that physician’s compensation. The conflicts of interest policy should also bar physicians from membership on the hospital’s compensation committee and should preclude any
voting member of the compensation committee from voting on matters pertaining to that member’s compensation.
2. Reasonable Compensation. Does the compensation arrangement with the physician result in total compensation that is reasonable? Reasonableness of physician compensation is a fundamental factor in whether incentive compensation will be deemed to violate the proscriptions against private inurement and impermissible private benefit. The information letter cites reliable physician compensation survey data for physician specialty and geographic locale as helpful in establishing reasonableness.
3. Arm’s Length Relationship. Is there an arm’s length relationship between the hospital and the physician, or does the physician participate impermissibly in the management or control of the organization in a manner that affects the compensation arrangement? This factor is similar to the need for a conflicts of interest policy (and ideally an arm’s length relationship will be ensured by such a conflicts of interest policy).
4. Ceiling. Does the compensation arrangement include a ceiling or reasonable maximum on the amount the physician may earn to protect against projection errors or substantial windfall benefits? This factor helps demonstrate reasonableness by showing a maximum amount the physician can earn under the incentive compensation arrangement.
5. Reduction in Charitable Programs. Does the compensation arrangement have the potential for reducing the charitable services or benefits that the hospital would otherwise provide? The information letter provides no further guidance on this factor other than the question. Certainly, compensation arrangements that reduce charitable services or public benefits are going to be disfavored by the IRS.
6. Quality of Care and Patient Satisfaction. Does the compensation arrangement take into account data that measures quality of care and patient satisfaction? Advancing quality of care and patient satisfaction are substantial factors favoring the incentive compensation arrangement.
7. Net Revenue Based. If the amount a physician earns under the compensation arrangement depends on net revenues, does the arrangement accomplish the exempt hospital’s charitable purposes, such as keeping actual expenses within budgeted amounts, where expenses determine the amounts the hospital charges for charitable services? This factor only applies when the compensation arrangement is based on net revenues. If so, the IRS will look to see that the net revenue based compensation arrangement does not create an incentive to increase charges for charitable services.
8. Joint Venture. Does the compensation arrangement transform the principal activity of the hospital into a joint venture between it and the physician or a group of physicians? This factor seeks to ensure that an incentive compensation arrangement is merely reasonable compensation and not a joint venture.
9. Distribution of Profits. Is the compensation arrangement merely a device to distribute all or a portion of the exempt hospital’s profits to the persons who are in
control of the hospital? This factor also seeks to ensure that an incentive compensation arrangement is merely reasonable compensation and not an improper distribution of the profits of the hospital.
10. Business Purpose. Does the compensation arrangement serve a real and discernible business purpose of the exempt hospital, such as to achieve maximum efficiency and economy in operations that is independent of any purpose to operate the exempt hospital for the impermissible direct or indirect benefit of the physicians? Meeting a legitimate business purpose of the exempt hospital is a significant factor favoring an incentive compensation arrangement. Without such a business purpose it will be difficult to justify an incentive compensation arrangement.
11. Abuse or Unwarranted Benefits. Does the compensation arrangement avoid potentially abusive or unwarranted benefits because, for example, prices and operating costs compare favorably with those of other similar organizations? The information letter explains that this factor may be met by including effective controls to avoid increases in compensation predicated on increases in fees charged to patients. Also important, the IRS notes, are effective controls to guard against unnecessary utilization.
12. Services Personally Performed. Does the compensation arrangement reward the physician based on services the physician actually performs, or is it based on performance in an area where the physician performs no significant functions? This factor goes to the reasonableness of the incentive compensation arrangement. In order to be permissible, the incentive compensation should only be related to actual services performed by the physician.
The IRS concludes the information letter by stating that there is no prohibition or per se rule that prevents exempt hospitals from making incentive payments to physicians. Determinations by the IRS of whether an incentive compensation program for physicians complies with the proscriptions against private inurement and impermissible private benefit will be based on an analysis of these twelve (12) factors.
The IRS information is useful not only for physician incentive compensation arrangements, but also as general guidelines in structuring all hospital-physician relationships. It is important to note, however, that these are only IRS guidelines and any hospital-physician relationship must also be reviewed for compliance with other regulatory programs (e.g., Stark, fraud and abuse, etc.). With respect to physician incentive compensation, the Department of Health and Human Services Office of the Inspector General advisory opinions on gain sharing must also be considered.
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