United States: IRS Official Provides Preview Of Upcoming Report On Nonprofit Hospitals, Community Benefit Standard And Executive Compensation

In Jan. 12, 2009, Steven Miller, Commissioner for the IRS Tax-Exempt and Government Entities division, in a presentation before the Office of the Attorney General of Texas, provided insight into the upcoming final report by the IRS on its nonprofit hospital study. The community benefit standard used to determine whether nonprofit hospitals qualify for tax-exemption was a focal point for Miller. Miller asked "whether the community benefit standard continues to serve a useful purpose, or whether the time is approaching when a revised or new standard must be adopted to keep pace with the times." These questions, along with the ongoing scrutiny of tax-exempt hospitals by Sen. Charles Grassley (R-IA) in his role with the Senate Finance Committee, raise a concern that there is a concerted effort to do away with the community benefit standard at the federal level. With respect to executive compensation reported by nonprofit hospitals, Miller stated that although compensation was high, but permissible under current law, he wondered how it will be received in the court of public opinion.

Miller discussed the IRS nonprofit hospital study which involved a detailed questionnaire sent to more than 500 nonprofit hospitals in 2006 which focused on executive compensation and community benefit reporting. An interim report on the community benefit responses was issued in 2007. A final report from the IRS is expected soon, and Miller remarked that it will be very interesting. Some key facts and findings from Miller's preview of the report include the following:

• Hospitals reported average combined community benefit expenditures, in all categories, of 9 percent of total revenues with a median of 6 percent.
• Uncompensated care was by far the largest of the expense categories - 56 percent of expenditures (or 71 percent adjusted for the impact of research expenses of research hospitals).
• Large urban hospitals spent the most, both in terms of raw dollars and as a percentage of their revenues, on community benefit. Community benefit expenditures as a percentage of revenues were lowest for rural hospitals, and critical access hospitals had the lowest percentage of all types of community benefits and uncompensated care.
• Profit margins reported varied, with more than 20 percent of respondents in a deficit position, though on an aggregate basis the profit margin was 5 percent. Critical access and smaller hospitals had the slimmest profit margins, with research hospitals having the largest.
• Almost every hospital used comparability data to set executive compensation and relied on the rebuttable presumption rule.
• Of the hospitals selected for compensation examinations, there was widespread use of comparability data and the rebuttable presumption rule. Nearly all of the compensation arrangements reviewed were reasonable under the current standard.

Miller concluded that the existing community benefit standard may be outdated. The hospital study suggests that attempts to materially modify the existing standard will have a significant impact on certain hospitals (i.e., there will be winners and losers). A key effort for the IRS will be the new Form 990 Schedule H reporting rules and the data received which may determine whether refinements to the standard are warranted from the IRS's perspective. Miller left open the possibility that Congress may itself take the lead on changing the community benefit standard. He particularly noted that with significant changes possibly on the horizon in the way society delivers and pays for healthcare, such changes may dramatically alter the assumptions and ground rules affecting all aspects of health policy, not just tax exemption. Miller speculated whether the IRS is in the best position to decide whether and how to change the current exemption standard and how such changes might promote - or inadvertently frustrate - much broader health policy goals and changes.

The full text of Commissioner Miller's remarks can be found at this link.

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