A top official of the Internal Revenue Service today gave a preview of findings from a much-anticipated study of more than 500 nonprofit hospitals. Under the IRS’s microscope: The amount of compensation hospitals pay to top officials and how much “community benefit” hospitals provide the public.
Steven T. Miller, commissioner of the IRS’s tax-exempt and government entities division, said that almost every hospital that answered an IRS questionnaire for the study said it set compensation by following a set of federal rules. The rules allow charities to go through a series of steps-which include the use of data to compare salaries earned by executives at similar charities-to establish what is known as a “rebuttable presumption of reasonableness.”
“That is a good thing,” said Mr. Miller. “Still, the compensation amount paid to the top management officials will be considered high by some.”
Of the hospitals in the report that the IRS selected for closer inspection through audits, the amounts of compensation paid “were even higher,” Mr. Miller said. “These examinations confirmed widespread use of comparability data and the rebuttable presumption. We determined that nearly all of the compensation arrangements we reviewed were reasonable under the current standard. But compensation was pretty high, and while permissible under current law, I wonder how it will be received in the court of public opinion.”
Mr. Miller said the current federal “community-benefit” standard, used to help determine if a hospital qualifies for a tax exemption, “after a long and servicable career may be outdated. It may need a tune-up; it may need a new engine; we may need a new vehicle.”
Mr. Miller noted that the IRS created the standard in a ruling 40 years ago. Nonprofit hospitals have to show that they benefit their local areas and the public through such categories as having a full-time emergency room open to all regardless of ability to pay and being willing to admit all types of patients.
“Despite enormous changes in the health-care sector since then, and the seemingly diminishing distinctions between nonprofit and for-profit hospitals, that definition of the community-benefit standard continues to guide the federal determination of tax-exempt status for nonprofit hospitals,” said Mr. Miller.
A Wide Range
The IRS study shows that “there are are some hospitals that provide a great deal of charity care and other uncompensated care, but many that do not,” Mr. Miller said.
The hospitals surveyed by the IRS reported average combined community benefit expenditures in all categories of 9 percent of total revenues; the median was 6 percent, he said.
“Uncompensated care was by far the largest of the expense categories: 56 percent of expenditures,” Mr. Miller said. “If you take out the research expenses attributable to the 15 leading research hospitals in the study, which account for 93 percent of all research reported, uncompensated care constituted 71 percent of all expenditures,” he said.
Mr. Miller said large and urban hospitals spent the most on community-benefit costs, “both in raw dollars and as a percentage of their revenues. Community-benefit expenditures as a percentage of revenues were lowest for rural hospitals.” Profit margins at hospitals varied, Mr. Miller said, “with just over 20 percent of respondents in a deficit position, though on an aggregate basis the profit margin was 5 percent.”
According to Mr. Miller, the new Schedule H for the redesigned Form 990 that hospitals will soon be filling out “will allow us, and other observers, to analyze how-and how much-hospitals around the country are benefiting their communities.”
He added: “As that data comes in, we will assess whether we have identified the right set of expenditures for hospitals to report, and we will take a more informed look at whether any part of bad debt, Medicare shortfalls, or community building should count in the calculation of community benefit.”
“At the end of the day,” Mr. Miller said, “our work on the study indicates that any significant changes to the community-benefit standard would almost certainly benefit some hospitals and adversely affect others: There will be winners and losers.”
Said Mr. Miller: “We need to consider whether refinements to the standards are warranted. Should someone-Congress or the IRS-attempt to comprehensively redefine the community-benefit standard?”
Mr. Miller’s remarks, made in a speech at a conference in Texas, are available on the IRS’s Web site.