The IRS this year cleared the way for granting tax-exempt status to certain regional health information organizations (RHIOs, sometimes referred to as Health Information Exchanges or HIEs) and brought such organizations one step closer to becoming fully operational. RHIOs are formed to bring together healthcare stakeholders within a defined geographic area and govern health information exchange among them for the purpose of improving health and care in the particular community. They are also considered one of the building blocks for a national health information network and can serve as a vehicle for administering funding and incentives to support investment and adoption of health information technology.
Currently, one of the preferred business models for RHIOs is to structure the organization as a nonprofit entity. RHIOs typically develop their base foundation at the state and local level in communities throughout the country.
Tax-exempt status is often crucial, as the funding for RHIOs tends to be grants and donations from other nonprofit organizations, foundations and governmental agencies, which typically require the recipient to have a section 501(c)(3) designation.
The state and local grant-supported capital base allows an infrastructure to be built for earnings to sustain operations of the RHIO. The IRS, until recently, had delayed the approval process for RHIOs as it studied the permissible avenues to granting tax-exemption to the organizations. For many RHIOs formed as nonprofits, the path to becoming fully operational without tax-exemption created a substantial hurdle that either stalled or terminated their plans.
Section 501(c)(3) Status
The IRS struggled for several years with how to appropriately treat RHIOs as section 501(c)(3) organizations, while a backlog of exempt applications built up from RHIOs going back to 2005. While a number of applications had been reviewed, they were not as complete as the IRS would have preferred, particularly with respect to the RHIO’s description of its organization and operations. Although the IRS viewed the promotion of health and education as appropriate purposes for exemption in certain cases, the IRS has had concerns of a possible risk of RHIOs causing impermissible private benefit or private inurement, specifically with any role played by physicians, health plans and insurance companies.
Without any proper precedent for these new types of organizations and incomplete information from some of the RHIO applicants, the IRS felt that its hands were tied as it reviewed the requests for section 501(c)(3) status from these organizations. As a result, very few RHIOs were able to obtain section 501(c)(3) status until recent events changed the landscape.
HITECH Act Opens the Door
As part of the American Recovery and Reinvestment Act of 2009 (the Act), Congress enacted legislation designed to promote health information technology development and information exchange. Included in the Act was a stimulus which is intended to be used to increase the use of electronic health records by physicians and hospitals, known as the Health Information Technology for Economic and Clinical Health Act (HITECH ). The HITECH Act has regenerated an interest in RHIOs and indirectly provided an avenue for the IRS to begin approving exemption applications for RHIOs again.
The passage of the Act and the HITECH Act provisions finally gave the IRS a new avenue to develop a basis for granting tax exemption to certain RHIOs. According to the IRS’s website, with the HITECH Act, “Congress recognized that facilitating health information exchange and technology is important to improving the delivery of health care and reducing the costs of health care delivery and administration.' Specifically for the IRS, the legislative history acknowledges that certain organizations that are organized and operated to facilitate the exchange of health information, and that satisfy standards established by the Department of Health and Human Services, lessen the burdens of government and, therefore, may qualify for exemption under section 501(c)(3).
Lessening the Burdens of Government
In order for a nonprofit organization to be granted tax-exempt status under section 501(c)(3), it must be organized and operated exclusively for one or more exempt purposes. Historically, certain nonprofit organizations can qualify for tax exemption by lessening the burdens of government if they either reduce the burden upon the government to provide certain essential services, provide services directly to authorities that assist the government in performing its functions or provide services that may otherwise be an expense of government.
Lessening the burdens of government is one purpose that RHIOs should consider affirmatively demonstrating if they are seeking tax-exemption.
RHIOs Moving Forward with the IRS
The IRS defines a RHIO as an organization formed and operated to facilitate the exchange of electronic health records among hospitals, physicians and others in the health care system. There are currently a number of applications from RHIOs that the IRS has been working through in light of the requirements of section 501(c)(3) along with the Act. Several RHIOs have acknowledged that they have recently received favorable determinations from the IRS on their exempt status, including:
East Kern County Integrated Technology Association (California)
Vermont Information Technology Leaders Inc. (Vermont)
Rochester Regional Health Information Organization, Inc. (New York)
The IRS has now specifically identified lessening the burdens of government as a valid exempt purpose for certain RHIOs. This appears to be the primary focus that will be made on RHIOs, although other exempt purposes may be valid and support exemption, such as the promotion of health or education. For those RHIOs that are considering obtaining tax-exemption, in determining whether the organization actually lessens the burdens of government, the IRS will review the specific facts and circumstances applicable to that particular RHIO. The documentation to the IRS must clearly show that the RHIO is organized and operated specifically for a charitable purpose, such as lessening the burdens of government.
If a mutual and favorable working relationship between the RHIO and the government (whether federal, state or local) can be demonstrated, the IRS will consider such factor as positive in its review.
Additional information on the IRS position on RHIOs can be found on the IRS’s website. For more information, please contact Don Stuart or any member of Waller Lansden's Tax-Exempt Hospitals and Health Systems practice at 800-487-6380.
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.