The important points of this ruling that physicians should keep in mind are as follows:

*It is a final ruling. The commentary period is over. This is the IRS' last word on this subject.

*The ruling has precedential value. Unlike "private letter rulings" and previously released General Counsel Memorandums (GCMs), Revenue Ruling 97-21 has legal effect, and tax-exempt hospitals may cite it in disputes with the IRS. For this reason, the ruling can be considered to supercede in importance all other rulings.

*The ruling focuses on non-employees physicians. Hiring a physician as an employee obviates some IRS-related physician recruitment issues.

*The ruling solidifies three long-standing IRS positions. There must be a demonstrable community need for a new physician, all incentives must be "reasonable," and the recruitment agreement must be in writing.

*The ruling calls for board involvement. It endorses certain physician incentives given board approval and given adherence to written recruitment guidelines approved by the board.

WHAT THE IRS ALLOWS

Revenue Ruling 97-21 outlines five recruitment situations, and indicates what the recruiting hospital can offer physicians in each situation. Here is an important rule. Generally, the greater the need for the physician, the more that can be offered.

Based on the facts of each situation, hospitals may offer physicians:

*A signing bonus
*Malpractice insurance for a limited period
*Office space for a limited number of years at below market rent
*A mortgage guarantee on the physician's home
*Financial start-up assistance
*A private practice income guarantee for a number of years
*Malpractice tail coverage
*Reimbursement of moving expenses
*Reimbursement for one year's malpractice insurance to a physician already on staff willing to provide ob/gyn services to Medicaid/charity patients
*A net income guarantee to a physician already in the community and on the staff of another hospital in the community

Again, what can be offered depends on the circumstances of each hospital and its community. Generally, a demonstrable community need, board approval and a written agreement are necessary.

WHAT TO DO

As a physician being recruited by a not-for-profit hospital, what should you do?

First, determine if there is a need for your services in the community. This is an important step for you beyond the issue of compliance with federal regulations, because you will want to be sure a need exists for your services. For more information on how to determine if you are needed, see "Do They Really Need You?" The more the hospital can do to establish the need for your services in the community, the more it will be able to offer in terms of incentives.

You should also determine if the income guarantee is "reasonable." There are a variety of surveys showing physician income by specialty (see Physician Income). If what you are being offered significantly exceeds the amounts listed, the IRS may feel that the guarantee constitutes inurement, in which case both you and the hospital might be subject to fines or other penalties.

Keep in mind that such instances are very rare, and that no hospital or physician that we are aware of has been prosecuted by the IRS for offering or accepting inappropriate income guarantees.

It is also a good idea to ask if the hospital has a written policy on physician recruitment signed by the hospital's board indicating its commitment to following federal recruiting guidelines.

Again, the key is not to become a lawyer, but rather to remember that a hospital cannot offer you any type of incentive that it may want to and that you cannot accept any type of incentive.