United States: Healthcare Legal News: Volume 6, Number 2

Last Updated: October 13 2016
Article by Ralph Levy, Jr., Brian Fleetham and Timothy Cary

Restrictions on Fees Permitted under HIPAA for Copies of Medical Records

When health care providers provide copies of medical records to an individual patient or to third parties at the direction of that individual patient, they are permitted under HIPAA to recover "a reasonable, cost-based fee." Health care providers have generally determined this fee by relying on a schedule established by state statute, such as the Michigan Medical Records Act (MRA). However, recent guidance issued by the Office for Civil Rights of the U.S. Department of Health and Human Services (OCR) may preempt these state statutes if the state statutes are "contrary to" the guidance (i.e., where it is not possible to comply with both HIPAA and the state statute). Where state statutes merely provide greater rights of access than HIPAA, however, the state statute is not preempted and health care providers must comply with both.

The guidance issued by OCR permits a fee that includes only: (1) labor for copying the records requested by the individual whether in paper or electronic form; (2) supplies for creating the paper copy (e.g., toner and paper) or electronic media (e.g., CD or USB drive) if the individual requests that the electronic copy be provided on portable media; (3) postage, when the individual requests that the copy, or the summary or explanation, be mailed; and (4) preparation of an explanation or summary of the records, if agreed to by the individual. The guidance also describes three methods that health care providers may use to calculate the fee. First, the provider may calculate the actual labor and supply costs incurred to fulfill the request. However, this cost may only include the items outlined above. Second, the provider may develop a schedule of costs for labor based on average labor costs to fulfill standard types of access requests. Again, any such average may only be derived from the costs specifically permitted (so, for example, if time is spent searching and retrieving the information, this time may not be included). Finally, for all electronic requests of PHI maintained electronically, the health care provider may simply charge a flat fee of $6.50 (if paper is involved, however, one of the other two methods must be used).

This guidance arguably preempts fee schedules such as that under the MRA. The MRA established a fee schedule based on the number of pages in the records, ranging from $1.17 a page to $0.23 a page (as well as an initial fee of $23.34 that may not be charged if the patient requests his or her own record). This schedule is not cost-based, nor is it calculated based on actual or average costs of labor and supplies. More importantly, the MRA rates are likely much higher than the actual or average costs of labor and supplies. However, the MRA also provides that a "medically indigent individual" may not be charged anything for copies of their medical records. This provision is not contrary to anything in HIPAA, merely provides greater rights of access for certain individuals, and is therefore likely not preempted.

What this means for health care providers is that they can no longer rely on state statutes as a "safe harbor" with respect to the medical records fees they charge for information proficed to patients or to others at the direction of the patient. They will need to calculate their actual or average costs of labor and supplies, or outsource medical record production to a third party who has already calculated these costs.

Renewed Perils From "Zeroing Out" A Corporation At Year-End

Physicians who are involved in the financial management of their practices are all too familiar with the year-end scramble to "zero out" the corporation's profits. Under this technique, a physician practice that is structured as a "C" corporation will, after paying all of its year-end expenses, distribute its remaining profits to its shareholders as bonuses. A corporation that effectively uses this technique is left with little or no taxable profits at year-end and thus little or no federal tax liability.

A recent Tax Court case raises renewed concerns about this approach. That case, Brinks Gilson & Lione PC (TC Memo 2016-20), involved an intellectual property law firm structured as a professional corporation that was also taxed as a "C" corporation. Like most professional practices structured in that manner, it regularly issued year-end bonuses to its shareholders from its remaining year-end profits, thus minimizing both its year-end taxable income and any resulting federal tax liability. (While some physicians may delight to learn of attorneys facing scrutiny from the IRS and resulting penalties, the analysis of this case potentially applies to any professional corporation that is structured as a "C" corporation that issues its remaining year-end profit as bonuses to its shareholders regardless of the type of services provided.)

That case involved two particularly troubling aspects. As a result of an audit prior to the actual Tax Court case, the law firm ultimately acceded to the determination of the Internal Revenue Services that at least some portion of the year-end bonuses issued by the corporation to its shareholders should have been classified as dividends. A significant concern with this determination of the IRS is the prevalence of the use of the "zeroing out" technique by professional corporations and the tax effect of issuing dividends. Unlike a bonus or other form of compensation, a dividend is not a deductible expense. A corporation that issues dividends is thus usually left with some amount of year-end taxable income. And, unlike individual tax rates, which are graduated, a corporation's federal tax rate is 35%, beginning with the first dollar of taxable income. Accordingly, if the IRS is now signaling that using the "zeroing out" technique to the exclusion of issuing dividends of some amount is disfavored or even impermissible, professional corporations may need to reconsider their approaches and structures or risk incurring tax liability and/or potential tax penalties.

The other problematic aspect of that case was the Tax Court's conclusion that the law firm lacked "substantial authority" in support of its position. In other words, the Tax Court ruled that the law firm did not have a reasonable basis under the tax code for claiming a deduction for the year-end bonuses it issued to its shareholders. The Tax Court rejected the law firm's defense that it acted reasonably and in good faith by relying on its accountants. As a result, the law firm had to pay penalties in addition to potential taxes resulting from the dividends it agreed to pay as a result of its audit.

This is not the first time the Tax Court has issued a ruling like this. In 2001, in Pediatric Surgical Associates, PC. v. Commissioner (TC Memo 2001-81), the Tax Court also ruled that a portion of year-end bonuses paid to that professional corporation's shareholders had to be recharacterized as dividends. That case involved a professional corporation with four shareholder-physicians and two nonshareholder physicians. The Tax Court held that some portion of the profit generated by the nonshareholder physicians and distributed to the shareholders represented a return on the investment of the shareholders in the corporation and thus constituted a (nondeductible) dividend rather than some form of (deductible) compensation.

When the Pediatric Surgical Associates case was issued, some suggested that it was merely an aberration that did not necessarily reflect the IRS's general position. The recent Brinks Gilson case, which specifically cited the prior Pediatric Surgical Associates case, seems to confirm the IRS's prevailing view that a professional corporation should typically pay some "reasonable" amount of dividend to its shareholders and that "zeroing out" a professional corporation at year-end through bonus distributions without any associated dividend may involve at least some degree of tax-related risk. On the other hand, the IRS has not announced, at least publically, that it is making this matter a particular enforcement priority. At least for now, it seems that the IRS will challenge corporations that "zero out" in this manner when the opportunity arises but that it probably is not investigating corporations only for this.

The dilemma for professional corporations that regularly "zero out" at year-end without paying dividends is how to react to this latest ruling. Many professional corporations have done nothing differently since the 2001 Pediatric Surgical Associates case and have been fine from a tax standpoint. Again, however, the Brinks Gilson case may signal a reason for greater concern.

One option for professional corporations is to pay a "reasonable" dividend of some amount to its shareholders. If the shareholders' paid in capital (i.e., their aggregate shareholder buy-in payments) is not too large, issuing dividends of between five and ten percent of that invested capital would probably not be large enough to result in either significant taxable income or federal income taxes. Under this approach, the corporation would use some of its year-end profits to pay a dividend and then distribute the rest as shareholder bonuses, just as before. This step alone would probably be sufficient to avoid the sorts of problems identified in the Brinks Gilson and Pediatric Surgical Associates cases. But this approach might not be financially viable for a corporation with significant shareholder equity or that already has some amount of federal income tax.

At a minimum, a professional corporation should have a specific, articulated shareholder compensation methodology, preferably one that is directly connected to each shareholder through appropriate provisions in each shareholder's employment agreement. With that in place, if the IRS asserts that some portion of the corporation's year-end bonuses to its shareholders should be recharacterized as dividends, the corporation has an argument that it would be in breach of its established contractual compensation obligations if it were required to pay some amount as a dividend that would reduce those payments. For this approach to have a chance of being effective, the compensation methodology would need to provide for a specific formula for allocation of profits, rather than merely stating that any year-end profits will be generally distributed as shareholder bonuses.

Especially in small or mid-sized professional practices, many different shareholders often perform some amount of the administrative services necessary to support the corporation's operations. Another possible approach is to explicitly identify those services and specify that some amount of a shareholder's total compensation is for performing those administrative services. That would involve appointing each shareholder as a particular officer of the corporation, developing at least minimal job descriptions for each of those positions, and formally designating, in either each shareholder's employment agreement or the corporation's compensation methodology, that some amount of a shareholder's total compensation is for performing his or her designated administrative duties. Although probably not likely to be as effective as paying a dividend, this approach would provide a professional corporation with another potential argument against an attempt by the IRS to reclassify a portion of year-end bonuses as dividends.

In response to the Pediatric Surgical Associates case, some professional practices made "S" corporation elections or even converted into professional limited liability companies. While those approaches effectively eliminate the potential dividend issue identified in this article, they have other potential consequences. For example, converting a corporation into a professional limited liability company can result in one-time, immediate taxable consequences. In addition, the eligibility and tax treatment of certain employee benefits (such as health insurance and medical expense reimbursement plans) are handled differently for shareholders of a corporation that makes an "S" corporation election as compared to these tax consequences for the owners of a professional limited liability company, which may not be appealing to those shareholders or owners.

In light of this recent tax case regarding these matters, professional corporations that have historically "zeroed out" profits at the end of each year may want to take this opportunity to discuss this issue with their professional advisors and undertake some additional planning before another year-end approaches.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Ralph Levy, Jr.
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.