The War Is On: Why Your Medical Staff Needs to Incorporate and Obtain Its Own Independent Counsel

Charles Bond, Esq.

In This Article

FAQs: Incorporating Your Medical Staff

1. Why incorporate our medical staff?

We recommend incorporation of medical staffs for the reasons outlined in the left column of the Table . In our opinion, they greatly outweigh the cons listed on the right.

2. Would it be a nonprofit corporation?

Preferably, to obtain a tax-exempt status. The medical staff can operate as a nonprofit membership corporation just like a medical association or professional society. The Medical Executive Committee can serve as the equivalent of the corporate board of directors or trustees.

3. Is it costly to set up and maintain?

Not particularly, in view of the advantages of incorporating (see Table ). In the past, opponents of medical staff incorporation (mostly hospital lawyers) have cited increased costs. Law firms who believe strongly in the need for medical staff incorporation have developed low-cost flat-fee packages, including model bylaws, to help medical staffs declare their independence.

4. Does my hospital board of directors have to recognize the corporation?

No. Adopting the corporate form assures the medical staff of corporate independence. A hospital board of directors or administrators could not attempt to dictate or override the acts of the medical staff that is organized as a separate corporation, nor could the Hospital's Board of Directors attempt -- as they so often do -- to adopt Hospital corporate bylaws that purport to trump medical staff bylaws. The adoption of the corporate form for the medical staff thereby eliminates the problem of unilateral amendment of medical staff bylaws by the Hospital. If, in the exercise of its independence and self-governance, the medical staff elects to be organized as a corporation under general principles of corporate law, the hospital board may not unreasonably withhold its approval of the bylaws, simply because they are in corporate form. It is prudent, however, to obtain a working agreement between the medical staff and the hospital.

5. Would the medical staff corporation be eligible for tax-exempt status?

Yes. Once incorporated as a nonprofit corporation, the medical staff should apply for tax-exempt status. Even if the medical staff does not incorporate, it should seek a tax exemption and its own tax as an unincorporated association. This is a highly regulated area and the application for tax-exempt status must be worded very carefully. Therefore, it is strongly advised to retain the services of experienced advisors in this regard.

6. Would the hospital still provide the medical office staff and secretary?

Yes. Personnel arrangements between the medical staff and the hospital will remain the same after incorporation, and would be governed by the agreement between the medical staff and the hospital.

7. Would the department or committee structure of our medical staff have to change?

No. The Medical Executive Committee could serve as the equivalent of the corporate board of directors or trustees and the other committees could remain in place as well.

8. Would peer review change?

No. Virtually all aspects of the medical staff's role at the hospital, including administrative matters, peer review, credentialing, etc., would remain unchanged after incorporation.

9. Would my medical staff dues still be deductible?

Yes. Conversion of the medical staff into a tax-exempt entity should ensure deductibility of all contributions to the medical staff. The retention of an experienced advisor in setting up the corporation and handling deductibility issues is strongly recommended to ensure maximization of all tax benefits in this regard.

10. If my medical staff pays the chief of staff and/or other medical staff officers, would the medical staff have to withhold taxes like an employer?

Yes. Whether or not the medical staff incorporates, any physicians it pays should legally be characterized as employees, not independent contractors.

11. Who would pay legal expenses for medical staff disciplinary proceedings?

Whether or not the medical staff incorporates, legal expenses for medical staff disciplinary proceedings should be borne by the medical staff. The hospital, however, should reimburse the medical staff for those expenses.