HFMA VIEWS

This week’s report from the IRS on executive compensation and community benefit in the not-for-profit hospital sector is providing fodder for both sides of the debate on the issue of not-for-profits’ tax-exempt status.

The report, which was based on a questionnaire sent to 500 not-for-profit hospitals, found that compensation for the top management official--typically the CEO--averaged $490,000. The IRS noted that there “may be a disconnect” between what members of the public, as taxpayers, consider reasonable and what is permitted under tax law. Certainly, as the Wall Street Journal’s Health Blog pointed out, the timing of the report was not ideal. A lawyer for not-for-profit hospitals quoted by the Journal said that this report lands in a “toxic environment” and suggested that the tax exemption received by not-for-profits is similar to the bailout money for the banking and automobile industries. But as the IRS itself notes in the report, the compensation levels reported by the hospitals in its study are supported under current law, and “nearly all examined amounts were. . .within the range of reasonable compensation.” To add some perspective, we should remember that the average hospital CEO compensation reported in the study was less than half of John Thain’s office remodeling budget at Merrill Lynch.

The community benefit section of the report found that not-for-profit hospitals spent, on average, 9 percent of their revenues on community benefit expenditures. The actual distribution of this spending was uneven, however, with hospitals in high-population urban areas spending the most, and with the bulk of uncompensated care and medical research expenditures concentrated among a relatively small number of hospitals. The American Hospital Association, in responding to the report, notes that “there are good reasons for variation in how hospitals meet their community benefit obligations. A hospital in rural Iowa serves a very different community than one in New York City and the programs and services they offer should be different.”

Senator Charles Grassley (R-Iowa), who has cast a critical eye on community benefit reporting by not-for-profits, described the IRS report as “helpful,” but also stated that he intends to ask the IRS for a report comparing not-for-profit and for-profit hospitals. He also indicated that he would like to see charity care replace community benefit as the justification for tax-exempt status. “The Treasury Department could do a lot of good, and probably more quickly than Congress, by re-establishing those charity care requirements,” Sen. Grassley stated, “and if it looks like that can't get done, then Congress will have to step in.”

In observations on the report’s findings, the IRS notes that the new Schedule H of Form 990 should provide more accurate and complete data on community benefit as discussions about the community benefit standard continue. An article by Travis Patton in the February issue of hfm magazine offers advice  on preparing for Schedule H reporting. Based on the report’s findings, not-for-profit hospitals should also ensure that they continue to adhere to the Internal Revenue Code's rebuttable presumption standard in determining executive compensation.