Navigating the Murky Tax Waters of Telemedicine

By Janice M. Smith, CPA, J.D., and John V. Woodhull, J.D.
| 7/14/2015

Telemedicine and the ability to interact with patients even without face-to-face visits offer providers tremendous opportunities to care for more patients at lower cost by reaching them more affordably in their homes and in remote locations. But even with the increase in telemedicine programs, tax implications remain unclear. Organizations should examine how to best position themselves for favorable tax treatment.

Telemedicine’s Growth

Despite questions about reimbursements and the reluctance of some physicians to participate, healthcare organizations no doubt have embraced telemedicine.

hc-connection-physican_250Ninety percent of healthcare executives in a 2014 survey of not-for-profit and for-profit providers reported that their organizations had begun developing or implementing a telemedicine program.1

The Affordable Care Act is driving much of this growth, putting pressure on providers to reduce the cost of care while raising quality and safety. According to one estimate, telemedicine could yield an estimated $6 billion a year in healthcare savings.2

Fifty percent of respondents in the survey of healthcare leaders cited improving the quality of care as the primary purpose of their forays into telemedicine, while 18 percent of respondents pointed to the opportunity to reach new patients as their main goal.

At the same time, however, providers do not expect a quick return on their investments. Only 11 percent of respondents ranked the potential for increased revenue as a reason for investing in this new mode of delivery.

Tax Implications

Despite the certainty of the telemedicine boom, the tax implications of this major shift in care delivery remain murky, at least for now. Telemedicine is still relatively new compared with the principles governing tax implications for tax-exempt healthcare providers. There is little, if any, IRS authority on point.

How does a tax-exempt organization participate in telemedicine without generating what might be interpreted by the IRS as unrelated business income?

Much of the gray area about telemedicine’s tax implications comes from the traditional definition of “patient,” according to the IRS, as a person who receives care or treatment within the institution’s walls. Questions along the lines of “How is this person your patient?” seemingly apply in audits involving telemedicine.

Telemedicine provides care remotely. In many cases, care is delivered to individuals, including individuals in other states, who never have set foot in any of the organization’s facilities.

Another gray area for tax-exempt organizations is the explosion of commercial activity by entrepreneurs and large companies developing telemedicine applications and technology. The primary technological expertise for telemedicine is coming from outside the tax-exempt healthcare system. At the same time, regardless of the technology, the medical expertise needed to put this technology to use is coming from the tax-exempt provider.

Will the IRS say that this care is not related to an organization’s tax-exempt purpose because 1) the care isn’t serving people in the community and 2) the care is being given in partnership with a for-profit entity?

Perhaps telemedicine’s enormous growth necessitates an expanded definition of the mission of the tax-exempt organization and broadened definitions of “patient” and “community” to include not only individuals seen at the hospital or outpatient facility but individuals who benefit from the organization’s expertise through services delivered remotely.

The traditional patient and nonpatient criteria for determining unrelated business income is quickly becoming outdated and arguably needs to incorporate a more expansive, realistic definition of healthcare delivery. (Recall how long it took for tax law to catch up to the realities of technology in the tax treatment of cellphones.) In fact, a more expansive definition of healthcare delivery is consistent with the interoperable health IT “ecosystem” called for by The Office of the National Coordinator for Health Information Technology.3 This national learning system will use technology, including telemedicine, to allow providers to share data and expertise to improve care and save lives.

For now, from a tax perspective, you can best position your organization by showing that the delivery of telemedicine services benefits your community and is consistent with the charitable mission of your organization, with an emphasis on interpreting “community” as broadly as possible and as not limited to the traditional definition of community as merely the people who walk through your doors.

Positioning Your Organization

It is important for your organization to illustrate how the delivery of telemedicine services benefits the broadened interpretation of community.

Document instances in which telemedicine has enabled you to reach individuals, such as those living in remote areas, who otherwise might have difficulty obtaining access to healthcare services. Be prepared also to show instances in which telemedicine has allowed your organization to meet the goals of healthcare reform by reaching people more efficiently and at reduced cost while raising quality and improving outcomes and how telemedicine has allowed your organization to serve uninsured and underinsured patients.

In addition, be aware that the need to characterize telemedicine as part of your tax-exempt function takes on extra importance when telemedicine services are delivered in other states.

Will this strategy guarantee favorable tax treatment of income from your telemedicine program? The IRS will look at facts and circumstances and, one hopes, recognize the vast disparity between the tax law and the reality of modern healthcare delivery. Absent official IRS guidance, however, the tax-exempt healthcare provider’s task is complicated.

The goal for tax-exempt providers should be to move away from a discussion of patient and nonpatient to discuss instead whether the organization is serving the community. The community health needs assessment (CHNA) required of all not-for-profit healthcare providers offers the opportunity to define “community.” This community can be geographic, based on specific areas of medical expertise, or some combination of the two. Hospitals can be proactive in this regard by spelling out the scope of their services and expertise in the CHNA. An organization with regional or national expertise in cardiovascular care, for example, may define its community beyond traditional boundaries for the treatment of heart disease.

It is incumbent upon tax-exempt providers to know that at some point the IRS will look at their delivery of telemedicine services. They should be prepared to explain and demonstrate how telemedicine furthers the organization’s exempt purposes.


1 “2014 Telemedicine Survey Executive Summary,” Foley & Lardner LLP, Nov. 11, 2014,

2 “Current Telemedicine Technology Could Mean Big Savings,” Towers Watson, Aug. 11, 2014,

3 “Connecting Health and Care for the Nation: A Shared Nationwide Interoperability Roadmap, Draft Version 1.0,” The Office of the National Coordinator for Health Information Technology, 2015,

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