Why Can’t Physicians Interoperate? Barriers to Adoption of EHRs

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The goal of widespread adoption of interoperable electronic health records (EHRs) in the United States remains a mirage, despite new regulations designed to clear the way for such shared information systems.

The Department of Health and Human Services (HHS) recently created an anti-kickback EHR safe harbor and a Stark EHR exception to legal restrictions on efforts of physicians and provider organizations to collaborate in the creation of shared information systems.

Yet barriers to adoption of EHR continue to exist despite these efforts. Physicians are not widely receiving donations of software and services to assist them in converting to interoperable EHRs, in large part because of overly extensive technical conditions of the safe harbor and tax ramifications for tax-exempt hospitals and physicians receiving donated EHR technology.

Other overarching barriers to physician adoption of EHRs include the lack of interoperability standards and the disconnect between the costs borne by providers for EHR adoption and the benefits that largely accrue to payers and consumers.

Safe Harbor Conditions Reflect Technical Barriers

The secretary of HHS finalized the anti-kickback safe harbor for EHRs in the Aug. 8, 2006, Federal Register. The safe harbor provides that remuneration, as prohibited under the anti-kickback law, does not include nonmonetary remuneration (consisting of items and services in the form of software or IT and training services) necessary and used predominately to create, maintain, transmit, or receive an EHR, if all of 13 conditions are met.

The Stark exception—also finalized in the Aug. 8, 2006, Federal Register—essentially mirrors these conditions, with the exception of condition no. 12, to he discussed below.

For healthcare providers seeking to meet the conditions of the safe harbor, the devil is in the details.

Extent of safe harbor coverage. The anti-kickback safe harbor covers only software, IT services (including connectivity and maintenance services), and training services (including help desk support services) necessary and used predominantly to create, maintain, transmit, or receive EHRs. For this purpose, EHR is defined broadly to mean a repository of consumer health status information in computer-processable form used for clinical diagnosis and treatment for a broad array of clinical conditions.

The safe harbor excludes hardware (and operating software that makes the hardware function), storage devices, and software with core functionality other than EHR (e.g., human resources or payroll software or software packages focused primarily on practice management or billing). Condition no. 9 specifies that the safe harbor does not cover staffing the recipient’s office or items and services used primarily to conduct personal business or business unrelated to the recipient’s clinical practice or clinical operations.

Condition no. 10 of the safe harbor states that the software must contain electronic prescribing capability—either through an electronic prescribing component or the ability to interface with a recipient’s existing electronic prescribing system that meets the applicable standards under Medicare Part D. Although EHR purposes must be predominant, the safe harbor protects arrangements involving software packages that include other functionality related to the care and treatment of individual patients (e.g., patient administration, scheduling functions, billing, and clinical support).

Many comments regarding the proposed regulations suggested that the proposed scope of the protected donation for EHR was too narrow. The concurrently issued safe harbor for electronic prescribing does allow donations of hardware, thanks to specific statutory authorization in the MMA. Nevertheless, the regulators did not protect hardware in the HER safe harbor because gifts of valuable, multifunctional hardware (such as computers and servers) would inherently pose a higher risk of constituting a disguised payment for referrals.

Disconnect between costs and benefits. An overarching barrier to EHR adoption is the disconnect between the costs of implementing EHR and the resultant benefits. Although providers are promised a return on their EHR investment in the form of savings in office supplies and administrative resources needed to pull and refile patient charts, the bulk of the benefits will accrue to payers and consumers in the form of reduced spending on health care. A recent study by RAND estimated that of the $77 billion per year in estimated savings when EHR adoption reaches 90 percent, $23 billion would go to Medicare and $31 billion would go to private payers (R. Hillestad, et al., “Can Electronic Medical Record Systems Transform Health Care? Potential Health Benefits, Savings, and Costs,” Health Affairs, Sept.-Oct. 2005).

The safe harbor perpetuates this disconnect, at least in part. Condition no. 1 of the safe harbor specifies that a donor must be either a provider of services covered by a federal healthcare program or a health plan. The safe harbor excludes as protected donors pharmaceutical, device, or durable medical equipment manufacturers, or other manufacturers or vendors that indirectly furnish items and services used in the care of patients. The safe harbor does not contemplate that Medicare, the single largest beneficiary of EHR technology, would donate EHR technology or provide related funding to providers. Providers are expected to gratuitously fund the adoption of EHR while payers and consumers reap the benefits.

Interoperabilily of the software. Condition no. 2 of the safe harbor requires that the EHR software be interoperable at the time it is provided to the recipient. Yet true compliance with this condition may be impossible to achieve. Consider, for example, that the preamble to the proposed regulations states, “[c]urrently, uniform interoperability standards for electronic health records and certification requirements necessary to ensure interoperability do not exist” (Federal Register, Oct. 11, 2005). These circumstances have not changed dramatically in the past two years.

For safe harbor purposes, software is deemed to be interoperable if a certifying body recognized by the secretary of HHS has certified the software within no more than 12 months prior to the date it is provided to the recipient. The secretary has recognized the Certification Commission for Healthcare Information Technology (CCHIT) as the certifying body, according to an HHS white paper published Aug. 6, 2007 (American Health Information Community Successor). In turn, CCHIT has certified more than 80 ambulatory EHR products, which can now be donated to healthcare providers in accordance with the safe harbor.

The federal government attempted to establish uniform standards for electronic transmission in the Health Insurance Portability and Accountability Act (HIPAA). After an extended rulemaking process, HIPAA regulations mandated use of electronic data interchange standards that were obsolete when they were adopted. HIPAA standards will need to be undone to make way for interoperable standards capable of managing huge fields of data in a common cyberspace accessible with a telephone, cable, or wireless connection.

The American Health Information Community (AHJC), a federal advisory body chartered in 2005, has recommended three sets of “interoperability specifications.” These specifications were approved by the Health Information Technology Standards Panel (HITSP), a standards panel established by the American National Standards Institute (the organization contracted by HHS to develop a process for reconciling competing standards). A recent report by HHS notes that the HHS secretary accepted these standards forming the basis of interoperability (Health Information Technology Initiative Major Accomplishments: 2004-2006). The report also notes that the HHS secretary accepted the AHIC’s recommendation that federal healthcare delivery systems develop an adoption plan to integrate the standards into their software systems by December 2007.

Recipient’s responsibility for cost of donated items. Condition no. 11 of the safe harbor requires that recipient pay 15 percent of the donor’s cost before receipt of the donated items and services. The regulators believed that cost sharing was an appropriate method to address some of the fraud and abuse risks inherent in unlimited donations of technology.

For example, using rough estimates of initial costs for a physician to implement an EHR certified by CCHIT as interoperable, the recipient would be required to pay 15 percent of the donated EHR software ($9,000) and the donated implementation training and support services ($12,000), or a total of $3,150. When added to the recipient’s hardware costs in the example, the recipient would pay $12,150 in initial costs to implement EHR.

The donor may not finance the recipient’s payment nor loan funds to be used by the recipient to pay for the items and services. Moreover, condition no. 4 sets forth a related restriction: Neither the recipient nor the recipient’s practice may extort a donation as a condition of doing business with the donor.

Other donor requirements. The safe harbor establishes a number of technical conditions on the donors of EHR software. According to condition no. 3, the donor may not take any action to limit or restrict the use, compatibility, or interoperability of the items or services with other electronic prescribing or EHR systems.

Condition no. 5 specifies that the donor must not determine the eligibility of a recipient for the items or services, or the amount or nature of the items or services, in a manner that directly takes into account the volume or value of referrals or other business generated between the parties. For this purpose, the donor is deemed not to directly take into account the volume or value of referrals or other business generated between the parties if any of the following conditions is met:

  • The determination is based on the total number of prescriptions written by the recipient (but not the volume or value of prescriptions dispensed or paid by the donor or billed to a federal healthcare program).
  • The determination is based on the size of the recipient’s medical practice (for example, total patients, total patient encounters, or total relative value units).
  • The determination is based on the total number of hours that the recipient practices medicine.
  • The determination is based on the recipient’s overall use of automated technology in his or her medical practice (without specific reference to the use of technology in connection with referrals made to the donor).
  • The determination is based on whether the recipient is a member of the donor’s medical staff, if the donor has a formal medical staff.
  • The determination is based on the level of uncompensated care provided by the recipient.
  • The determination is made in any reasonable and verifiable manner that does not directly take into account the volume or value of referrals or other business generated between the parties.

Under condition no. 7, the donor may not have actual knowledge of, and may not act in reckless disregard or deliberate ignorance of, the fact that the recipient possesses or has obtained items or services equivalent to those provided by the donor.

According to condition no. 8, the donor may not restrict or take any action to limit the recipient’s right or ability to use items or services that can be used for any patient without regard to payer status.

Proscription against shifting costs to a federal healthcare program. The one anti-kickback EHR safe harbor condition not mirrored by the Stark EHR exception, condition no. 12, is the requirement that the donor not shift the costs of the items or services to any federal healthcare program. In the proposed rule, the regulators expressed concern that donors may attempt to shift the financial burden of providing EHR technology to the federal healthcare programs or beneficiaries. Such shifting seems appropriate because Medicare and consumers significantly benefit from EHR. The safe harbor nevertheless prohibits such shifting. The Stark exception incorporates this condition indirectly by requiring that the arrangement not violate the anti-kickback law.

Administrative requirements. The anti-kickback safe harbor also lays out the administrative requirements for an EHR donation. Condition no. 6 specifies that the donation arrangement must be set forth in a written agreement that:

  • Is signed by the parties
  • Specifies the items and services being provided, the donor’s cost of those items and services, and the amount of the recipient’s contribution
  • Covers all of the EHR items and services to be provided by the donor (or any affiliate)

The safe harbor permits incorporation by reference to other separate agreements. Finally, condition no. 13 sets forth a sunset provision requiring that the transfer of items and services be completed by Dec. 31, 2013.

Tax Ramifications of Donations

The idea of donating EHR software has two important tax ramifications, one of which remains unresolved.

First, many hospitals are tax-exempt entities. Their donations of valuable software to private physicians might constitute impermissible private benefit or inurement in violation of section 501(c)(3) of the Internal Revenue Code.

The Internal Revenue Service stated in a memorandum dated May 11, 2007 (www.irs.gov/pub/irs-tege/ehrdirective.pdf), that it will not treat arrangements in which a tax-exempt hospital provides EHR software and technical support services (“health IT items and services”) to its medical staff physicians at a discount as impermissible private benefit or inurement in violation of section 501(c)(3) of the Code if:

  • The benefits fall within the range of health IT items and services that are permissible under the HHS EHR regulations
  • The hospital enters into subsidy agreements with its medical staff physicians for the provision of health IT items and services at a discount

According to the IRS, such subsidy agreements require that:

  • Both the hospital and the participating physicians comply with the HHS EHR regulations on a continuing basis
  • To the extent permitted by law, the hospital may access all of the electronic medical records created by a physician using the health IT items and services subsidized by the hospital
  • The hospital ensures that the health IT items and services are available to all of its medical staff physicians
  • The hospital provides the same level of subsidy to all of its medical staff physicians or varies the level of subsidy by applying criteria related to meeting the healthcare needs of the community

The second, unresolved tax issue is the possible income tax on the physician for the value of the unreimbursed cost of the donated software and services. Although denominated as a donation, a hospital cannot be seen as providing the software and services from detached and disinterested generosity, out of affection, respect, admiration, charity, or like impulses, so as to qualify for exclusion from taxable income under Section 102 of the Internal Revenue Code.

An analogous issue exists for frequent flyer miles—and the IRS has announced that it will not attempt to tax frequent flyer miles (IRS Announcement 2002-18). Until the IRS issues a similar announcement on donated EHR software and services, the recipients of such items risk having to pay federal and state income taxes on the 85 percent of costs that are unreimbursed. Assuming a physician at a combined federal and state marginal income tax rate of 40 percent, the physician would owe an additional $7,140 ($21,000 x 85 percent x 40 percent) in income taxes. This brings the physician’s total out-of-pocket expense to $19,290 for the EHR implementation. This analysis still omits the physician’s costs to comply with the heightened privacy and security requirements of HIPAA with respect to electronic health information.

Pending Legislation

Rep. Michael Burgess (R-Texas) has introduced legislation that would directly solve the anti-kickback and Stark barriers by amending the respective statutes. The Ensuring the Future Physician Workforce Act of 2007 (H.R. 2585), introduced June 6, 2007, would exclude nonmonetary remuneration in the form of health IT and related installation, maintenance, support, and training services from the scope of both the anti-kickback law and the Stark law. The proposed legislation defines health IT to include hardware and equipment, and provides a payment incentive for physicians to adopt EFIR. But even if a legislative solution to anti-kickback and Stark issues is achieved, the lack of interoperable standards and the disconnect between costs and benefits will continue to impede adoption of EHRs.


The anti-kickback safe harbor and Stark exception for EHRs have many technical conditions that eviscerate their utility, and tax issues continue to raise a barrier to hospitals’ and physicians’ efforts to create shared EHRs. The obstacles are clear:

  • Donated software must be interoperable, but uniform interoperability standards do not exist.
  • Donees must pay for all hardware and 15 percent of the software associated with implementing EHR.
  • Hospital donors must obtain burdensome subsidy agreements from physician donees to ensure maintaining their tax-exempt status.
  • Physician donees may face income taxes on the 85 percent unreimbursed cost of EHR software.

Add to these the overarching barrier presented by the disconnect between the costs borne by providers and the benefits that largely accrue to payers and consumers, and the cumulative effect is to discourage EHR donations at a time when the need for information sharing among provider organizations and physicians is paramount.

Hospitals and health systems should play a role in efforts to clear these barriers by supporting new legislation that would overcome the regulatory shortcomings of the anti-kickback safe harbor and Stark exception. More important, they should advocate for Medicare and other health payers to realign financial incentives to ensure that physicians receive an attractive ROI in EHR technology.

Meanwhile, healthcare financial leaders should bear in mind that effectiveness of hospitals’ or health systems’ collaborations with physicians will be an important factor in the future financial success of these healthcare organizations. The senior financial leader therefore should keep apprised of the industry’s progress toward these goals and help ensure his or her organization’s readiness to move ahead toward establishing strong, legally compliant electronic collaborations with physicians.

Note: This article was originally published by HFMA here.