Affiliated Service Group between hospital and Corporation employing anesthesiologists?

[Trekker]

Our client is a business Corporation whose employees are anesthesiologists and CRNA's.

A not-for-profit hospital owns 79% of the stock of this Corporation. The remaining 21% is owned by an unrelated person who is neither a licensed anesthesiologist nor a CRNA.

The employees of the Corporation (the anesthesiologists and CRNA's) provide anesthesiology services to patients of the hospital.

QUESTION: Are the hospital and the Corporation part of an Affiliated Service Group?

Any insights are appreciated!

[Guest Sieve]

First, I wonder how a professional corp (which the medical corp. seems to be) can be owned by an individual who is not licensed to practice medicine-- although I may be jumping to an unfounded conclusion here. In any event, I guess that would be a state law issue, beyond the scope of this board.

This can't be an A org relationship, because there's no PC which owns part of the FSO (see the proposed regs--1.414(m)--for the proper lingo, or ask in a subsequent post).

I don't think it's a B org, either, because there is no HCE employed by the Hospital who also owns an interest in the medical corp. (Ignore the proposed regs here--the statute has been changed, and now we're looking only at HCEs.)

And there apparently is no management group ASG relationship.

So, looks to me like there is no ASG.

[K2retire]

You have a corporation providing services (that would otherwise be provided by the parent corporation's own employees) to its parent corporation. How can it NOT be an ASG?

[Guest Sieve]

Simple. The statute (& proposed regs) require (for a B org), among other things: (i) that the services being provided must be those which an employee historically would provide (&, in the case of hospitals, physicians "historically" were not employees of the hospital--I have used that argument successfully with the IRS, albeit a long time ago), and, more to the point here, (ii) at least 10% of the ownership of the service provider (med. corp.) must be in the hands of HCEs of the FSO (the hospital). (IRC Section 414(m)(2)(B).) From your facts, it doesn't appear that the 2nd part of the above test is met here.

In other words, the ASG test is NOT simply that a substantial portion of the business of one organization is providing employee-type services for the other organization, but, rather, it is a more complicated multi-faceted test. It's not an ASG unless it meets all the requirements of an ASG.

[GBurns]

In my experience physicians (including anethesiologists) were "historically" employees. It was not until the late 1970's that the trend started to outsource these functions. It still is a trend and not yet the norm as far as it seems. This is also suggested by the fact that there is this OP.

[John Feldt ERPA CPC QPA]

And interestingly, the proposed regulation 1.414(m)-2©(3) states

"Services will be considered of a type historically performed by employees in a particular service field if it was not unusual for the services to be performed by employees of organizations in that service field (in the United States) on December 13, 1980."

What if the hospital is not the FSO, but the corporation is - would that change anything?

[ERISAnut]

I typically do not try to make responses to blow things up, but instead keep things simple. In this instance, I couldn't resist, so please excuse me. I think the intent of the 79% ownership is too obvious; being 80 minus 1. With this being the case, it opens the door of attributed ownership where the other 21% may get either excluded from consideration or attributed to the not-for-profit by a host of fact patterns that serve to assign the ownership to those who have authority to exercise certain 'power' associated with the ownership. So, on the surface, it appears that some genius may have calculated the ownership structure to avoid the controlled group rules.

[Guest Sieve]

J4FKBC -- I believe the corp cannot be the FSO, since the hospital is not performing services for the corp (and the FSO is the one in the regs for whom the services are performed).

GBurns -- Historically--and by that I mean before PC statutes (a trend of the 1960s)--a professional occupation could not be performed by an entity, but only by the professional, so docs were not employees of a hospital since the hospital could not practice medicine through its employees. That's really what I meant. A throw-away comment, not hugely pertinent to the topic.

ERISAnut -- You're probably correct that the ownership was purposely established such that there was no controlled group relationship. It also looks like it was established such that there was no ASG, either.

[J Simmons]

The anesthesia Corp is a PC and thus could be an FSO. Treas Reg § 1.414(m)-1© does not require that the A Org also be a PC, and it is the A Org that owns part of the FSO, not the FSO that owns part of A Org. IRC § 414(m)(2)(A)(i). So the fact that the not-for-profit hospital is not a PC and not an FSO does not negate that the not-for-profit hospital is perhaps an A Org that owns part of the anesthesia Corp that is the FSO.

The not-for-profit hospital is a shareholder of the anesthesia Corp (79%) and the not-for-profit hospital is regularly associated with the the anesthesia Corp in performing services for third persons. Thus, the not-for-profit hospital is an A Org, and the not-for-profit hospital and anesthesia Corp an ASG.

[GBurns]

A side issue came to mind and I thought to ask about it.

Isn't there a problem with a non for profit owning and controlling a for profit entity in such a close business relationship ?

[Guest Sieve]

John -- You're absolutely right, and I'm off-base again. The B org regs speak only in terms of a B org performing services for an FSO, and most of my comments in this string related to the B org relationship. But it would have been helpful if I had focused in on the "is regularly associated . . . in performing services for third persons" language in the A org regs! I conveniently overlooked that A org language and saw only the "regularly performs services for the FSO" A org language, and thus incorrectly concluded that there was no A org ASG. My apologies for misleading you all.

[John Feldt ERPA CPC QPA]

Thanks John!

[Trekker]

Thanks, everyone, for your insights.