RSNA: 2 legal tips for rad practices facing hardball negotiations with hospitals

CHICAGO—Every radiology practice in the midst of, or soon to face, tough contract negotiations with a hospital would do well to bone up on “excess benefit” sanctions and rule changes around no-cause contract termination.

W. Kenneth Davis Jr., a partner and healthcare specialist with Chicago-based Katten Muchin Rosenman, outlined the pertinent discussions members of contracting practices ought to be having among themselves and with their legal counsel.

He presented his pointers during a session at the annual meeting of the RSNA.

Over the past 10 to 15 years, Congress and the IRS have been focusing on tax-exempt hospitals, Davis pointed out.

Meanwhile, many state attorneys general have been focusing on the not-for-profit nature of these institutions vis-à-vis their exemption from, specifically, real estate and property taxes.

“When the plaintiffs bar got done with the tobacco companies many years ago, they sort of turned their attention to hospitals,” said Davis. “Now there is a lot of scrutiny on tax-exempt hospitals. You need to be aware of this because it colors all of your negotiations and your relationships with hospitals.”

Davis next ran through two changes at the IRS with ramifications for radiology groups contracting with hospitals.  

1.     Don’t get bitten by the excess-benefits bug.  

Davis urged rad practices to be cognizant of excess-benefit restrictions, which hospitals must navigate through changing waters.

For many years, if a not-for-profit hospital got into tax trouble, the only tool the IRS had to work with was the power to completely revoke the hospital’s tax-exempt status.

“That is a death penalty, if you will,” said Davis, “so the IRS came up with this concept of excess benefits.”

Today, if a tax-exempt hospital stumbles into the IRS’s crosshairs over excess-benefit transactions—including those involving private entities such as a contracting radiology group—the hospital can maintain its status so long as it repays the IRS, often in multiples assessed as penalties.

This change has colored relationships between hospitals and radiology practices, Davis said.

He described a classic scenario in which excess benefits come into play as one where the hospital comes in after the fact and says to the radiology practice:

We understand that you have been reading films from other locations in our hospital. These are bills that were generated in physician offices, bills that were generated in for-profit imaging centers, bills that were generated in other hospitals. As a result, because you’ve been reading those inside our hospital, you have been receiving excess benefit.

“That’s something you need to be cognizant of from a legal standpoint,” Davis said with understated urgency.

2.     Clue in your hospital on changes to ‘terminable without cause’ contracting.

Davis next turned to the happier effects of changes in tax-exemption laws on chronological lengths of negotiated contracts.

In 1997, he pointed out, the IRS set up Revenue Procedure 97-13. For most radiology practices, this meant that any agreement had to be terminable without cause upon reasonable notice after two years.

Even under 97-13, such a condition “was not a hard and fast rule,” Davis explained. “If you really felt that you needed a longer term than that, you could push for it. But most tax-exempt hospitals would come back and say, ‘My bond counsel will not allow me to do anything in excess of two years.’”

Then, in October 2014, the IRS issued Notice No. 2014-67. This changed 97-13 such that radiology practices can now negotiate a no-cut agreement for well over two years.

“That was a dramatic change from the standpoint of radiology groups,” Davis said, “because the longer term you can get without [risk of] getting cut—without being terminable without cause—the better.

“So if your hospital counsel comes back and tells you, ‘IRS rules require us to make it terminable without cause at two years,’ they are wrong. Period. And you need to point them to IRS 2014-67.”

“It’s actually mind-boggling how many hospital attorneys don’t know that this rule has changed,” Davis said.