Tuesday, January 13, 2009

IRS Official Gives Preview of Results of Study of More than 500 Nonprofit Hospitals

The Chronicle of Philanthropy reports that an IRS top official gave a preview of findings from a much-anticipated study of more than 500 nonprofit hospitals which focused on 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, indicated 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.” Mr. Miller stated that the examinations confirmed widespread use of comparability data and the rebuttable presumption. The IRS determined that nearly all of the compensation arrangements were reasonable under the current standard. But noting that compensation was “pretty high,” Mr. Miller speculated that such compensation might be judged differently in the “court of public opinion.”

As for the current federal “community-benefit” standard, used to help determine if a hospital qualifies for a tax exemption, Mr. Miller noted that the IRS created the standard in a ruling 40 years ago and suggested that the standard may now be outdated. Under the current standard, 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.

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.

The hospitals surveyed by the IRS reported average combined community benefit expenditures in all categories of 9% of total revenues with a median of 6%. “Uncompensated care was by far the largest of the expense categories: 56% 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% of all research reported, uncompensated care constituted 71% of all expenditures,” he 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 with just over 20% of respondents in a deficit position, though on an aggregate basis the profit margin was 5%.

According to Mr. Miller, the new Schedule H for the redesigned Form 990 that hospitals will soon be filling out will allow the IRS, and other observers, to analyze how-and how much-hospitals around the country are benefiting their communities. As that data comes in, the IRS intends to assess whether it has identified the right set of expenditures for hospitals to report, and to 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.

Mr. Miller said that the IRS needs to consider whether refinements to the standards are warranted and whether someone-Congress or the IRS-should attempt to comprehensively redefine the community-benefit standard.

Mr. Miller’s remarks, made in a speech at a conference in Texas, are available here.

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