It is hard to believe that telemedicine has been a clinical reality for almost 60 years, if you count from the literally space-age technologies NASA developed to monitor astronauts' health in the 1960s.
Now, telemedicine has both expanded in availability and contracted to a more local level, becoming an important part of many hospitals, home health agencies, private physician practices, as well as our homes. In 2015, according to the American Telemedicine Association, more than 15 million Americans received some type of remote medical care via technologies such as remote monitoring, video conferencing with physicians and smart phone chronic disease management apps. It may be even harder to believe, then, that in those 60 years, the IRS hasn't yet settled on a way to tax telemedicine – a lingering question that exposes the providers exploring it to potential audit and accounting risks.
To date, the IRS has not issued any guidance or rulings regarding telemedicine UBI, specifically. For now, tax-exempt healthcare organizations participating in telemedicine are subject to the IRS rules and principles that apply more broadly to UBI and healthcare activities – some of which, frankly, don't neatly fit, and some of which require careful documentation to avoid triggering UBI status.
Traditionally, the IRS has focused on whether an individual is receiving a healthcare service or an ancillary service. Healthcare services to individuals are considered substantially related to a hospital's exempt purposes. On the other hand, if the service is an ancillary service such as diagnostic lab testing or the provision of pharmaceuticals, then the income is excluded only if the person is a patient of the hospital, and then this is based upon an exception to UBIT for the convenience of the hospital's patients. There are also exceptions for casual sales or services to small hospitals at or below costs.
Interestingly, most of the tax uncertainty of UBI comes not from the definition of "telemedicine" but from the formal definition of "patient." IRS Revenue Ruling 68-376 defines a patient as:
In this current definition, the operative theme appears to be either that the person is or has been physically in the hospital or an affiliate, or that the person is receiving care or treatment by a hospital professional. Therefore, the question becomes whether the person receiving remote care delivered by a hospital physician or hospital professional becomes a patient of the hospital or, more significantly, is the service being provided considered substantially related to the hospital's healthcare mission.
In telemedicine, of course, the entire point is often to deliver care outside the traditional setting.
Given the uncertainty, tax-exempt healthcare organizations must be diligent in documenting how the care provided meets the organization's exempt purpose by:
Another piece of evidence may be whether the malpractice insurance covers the activity.
Further, state-level definitive tax guidance has not been issued in this area. Currently, as the Federal government is doing, states are following traditional rules in regards to UBI. From most states' perspective, if any of the telemedicine activity generates UBI and crosses state lines, the income may require apportionment among the states based on activity in the respective states and the hospital may have to file a tax return in that state. The organization needs to address where the sale of the personal services occurs, where the patient is located, and where the services are being performed. Some states look to where the cost of performance are incurred, and other states look to where the time is spent performing the services in determining if there is nexus and requirements to report items in those states. While the provision of a cyber space consultation may be considered related to exempt purposes, questions could arise as to whether the sale of pharmaceuticals to the out of state patient create UBI and also, whether the sales are subject to sales tax.
The traditional patient and non-patient criteria for determining UBI is dated, both the IRS and the states need to reexamine the definitions of a patient as well as the definition of providing healthcare services.