Legal limits to physician incentives: private inurement

For a nonprofit hospital in today's competitive climate, loss of tax-exempt status may be catastrophic. Recent rulings by the Internal Revenue Service indicate that a hospital that provides physicians with overgenerous financial incentives to recruit or maintain them on its medical staff risks just such a result. This article explores the legal doctrine of "private inurement," which prohibits charitable organizations from serving private interests, and the doctrine's application to physician incentives given by exempt hospitals. The article underscores the need for great caution in structuring the incentives and recommends that nonprofit hospitals make a practice of obtaining advance letter rulings from the Service.