1. HIT Legal Issues: Legal Structure and Tax Status
HIT SUMMIT WEST MARCH 7, 2005
Gerry Hinkley Rachel Glitz
Davis Wright Tremaine LLP ~ San Francisco

2. Overview and Assumptions
Some form of regional organization is needed
Minimum geography
Broad functionality
Top down
Bottom up

3. Top Down Assumptions We will build it, they will come
Collaborative effort
Dependent on grants
No revenue model
The right thing to do

4. Bottom Up Assumptions Provider systems EMRs for competitive reasons
Joint activity makes business sense
Need to ensure EMRs will be interoperable
Risk management
Ca-Ching

5. Identifying RHIO Functions
Business Planning and Implementation
Forum for stakeholders
Standards for interoperability
User/participation consensus
Chains of trust
Baseline standards for security and privacy
Connecting to other networks
Pointers to information
Education
Cont…

6. Identifying RHIO Functions (Cont.)
Establishing network functionality
Access to information
Clinical support
Public health
Disease management
Group purchasing
Vendor vetting
Pilot projects
Sustainability
Preparing for change
Mergers/Acquisitions

7. Identifying Funding Sources
Dependent on revenue model
Grants
Venture capital
Debt
Fees

8. Stakeholders Providers Payors Government/Public Health Patients
IT Vendors

9. Models
Corporation
Pass-through entity
Governmental Authority

10. Corporation Attributes Governance Charitable or proprietary
Value/Liquidity
Risk management
Tax status

11. Tax Exempt Corporation
Formation as nonprofit corporation (the easy part)
Obtaining and maintaining exempt tax status (the harder part)
Why bother?
Advantages
Disadvantages

12. 501(c)(3) Corporation
Must be organized and operated “exclusively” for “charitable purposes”
Organizational “test”
Operational “test”

13. “Organizational Test”
Must be formed as a nonprofit entity
Articles of Incorporation (or other organizing document) must reflect that RHIO:
is organized exclusively for a charitable purpose identified under Section 501(c)(3)
may not engage, more than insubstantially, in any activities that do not further its exempt purpose
does not permit any part of its net earnings to inure to the benefit of a private shareholder or individual

14. “Operational Test”
Must operate “exclusively” for a charitable purpose:
Promotion of Health
improving the quality of care
improving the efficiency of care
preventing medical errors/enhancing patient safety
benefiting medical research
Educational Activities
library rulings
“CHIN” ruling

15. Public Charity Status
Preferable for 501(c)(3) to qualify as a “public charity” and not a “private foundation”
To meet test, RHIO must:
be a supporting organization, to another 501(c)(3) or
satisfy one of the “support tests” demonstrating that its funds are derived from the public and/or gifts and fees from its exempt activities

16. 501(c)(4) Corporation
Must not be organized for profit and must be operated “exclusively” for the “promotion of social welfare”
to further the common good and general welfare of the people of the community, as a whole (may overlap with (c)(3) purposes)
no part of the net earnings may inure to the benefit of any private shareholder or individual

17. Advantages of (c)(4)
Permitted to lobby and engage in some political activities
Not required to meet public support test applicable to (c)(3)
Practical alternative for organizations that fail to meet 501(c)(3) requirements

18. Disadvantages of (c)(4)
Contributions by donors are not tax deductible
Contributions from (expenditures by) private foundations to a RHIO organized as a (c)(4) are limited by taxable expenditure restrictions:
purpose of grant must be exclusively charitable
foundation must satisfy “expenditure responsibility” requirements

19. For Profit Corporation
Does not enjoy benefits of tax exempt status
Tax Implications for return on equity investment by nonprofits
Private Benefit
incidental private benefit only
Inurement
private benefit to “insiders” absolutely prohibited
Intermediate Sanctions (excise tax on excess benefit imposed on recipient and RHIO’s manager)
UBIT
possible if for profit is a nonprofit’s subsidiary

20. Pass-Through Entity Attributes Governance Charitable or proprietary
Value/Liquidity
Risk management
Tax status

21. Advantages Partnership or LLC is not a separately taxable entity
Avoid burdens of applying for and maintaining exemption
Enables each participant to keep its own tax attributes

22. Disadvantages
Creates potential tax risks for exempt partners (or members)
could jeopardize exempt status
must further exempt purpose
may only benefit non-exempt participants “incidentally”
could require payment of UBIT

23. Governmental Authority
Attributes
Governance
Revenue sources
Risk management
Sunshine laws
Tax status

24. Tax Implications
Governmental authority need not apply for recognition of exemption (automatically considered a “public charity”)
Beneficial to RHIO contributors:
Contributions are tax deductible
If contributor is an exempt organization, contributions equate to gift of public funds (no private benefit issue, provided funds are used for public purposes)

25. Practical Hurdles
Must rely on legislature for initiative, funding, organization and operation
Potentially takes control away from RHIO users

26. Entity Selection Drivers
Functionality
Governance
Role for stakeholders
Revenue model and funding
Tax attributes
Long term viability

27. Process Stakeholder input Top down Think of things to do Bottom up
Address identified needs
Which organizational model will best accomplish the goals
Stakeholder buy-in
Implementation – incubator to independence