January 29, 2009 | Read Time: 3 minutes
A top official of the Internal Revenue Service, speaking at a conference on charitable hospitals held by the attorney general of Texas, offered a preview of findings from a much-anticipated study of more than 500 nonprofit hospitals. The report focuses on how much compensation hospitals pay to top officials and how much hospitals do to provide charitable services to people in the neighborhoods where they are located.
Steven T. Miller, commissioner of the IRS’s tax-exempt and government-entities division, said almost every hospital that answered an IRS questionnaire said it followed a set of federal rules in setting compensation. Those rules set out a series of steps — including the use of data to compare salaries earned by executives at similar charities — by which charities can establish that they have done everything possible to set a reasonable salary. Federal rules call that threshold 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.”
At the hospitals in the report that the IRS selected for closer inspection through audits, salaries and other compensation “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, which the IRS uses to help determine a hospital’s eligibility for tax-exempt status, “after a long and serviceable career may be outdated.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 must show that they provide benefits to the people and neighborhoods in the region they serve. The ruling said one way hospitals can show they are providing a “community benefit” is by having a full-time emergency room open to all people regardless of their ability to pay.
“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.
The IRS study shows that “there are some hospitals that provide a great deal of charity care and other uncompensated care, but many that do not,” Mr. Miller said.
Hospitals surveyed by the IRS reported that the amount they spend on community benefits was 9 percent of total revenues on average; 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’s speech at the Texas conference is available on the IRS’s Web site.
