On February 11, 2009, the IRS issued its Exempt Organizations Hospital Compliance Project Final Report (the Final Report), which shows the results of several years of study of nonprofit hospitals by the IRS. The Final Report is the culmination of IRS studies of community benefit and executive compensation initiated in 2005. The Final Report is based on both responses the IRS received to questionnaires sent to 500 nonprofit hospitals and the IRS’ examination of the executive compensation practices of 20 nonprofit hospitals. The questionnaire was criticized because it did not define uncompensated care or provide guidance as to what expenditures should be included as community benefit expenditures.  

The results of the Final Report are summarized by the type of community in which the hospital is located (high population, other urban and suburban, critical access hospitals and other urban) and the hospitals’ annual revenues (under $25 million, $25 million-$100 million, $100 million-$250 million, $250 million-$500 million and over $500 million). The IRS also summarized community benefit expenditures by the income and health insurance levels of the areas surrounding the hospital and the amount of the hospital’s expenditures on medical research.  

The Final Report includes the following:  

Community Benefit

  • The average amount of expenditures on community benefit was 9% and the median was 6%.
  • The community benefit expenditures were highest for high population hospitals and lowest for rural and critical access hospitals.
  • The largest community benefit expenditure generally was for uncompensated care (56%). Expenditures for medical education and training (23%), research (15%), and community programs (6%) accounted for the balance of community benefit expenditures.
  • 58% of the hospitals reported uncompensated care in amounts less than or equal to 5% of total revenues.
  • 9% of the hospitals reported 60% of the aggregate community benefit expenditures of the entire sample, and 14% of the hospitals reported 63% of the aggregate expenditures for uncompensated care.
  • Most of the hospitals reported excess revenues of 5% of total revenues, with large revenue hospitals showing the most excess revenues and critical access hospitals showing the least.  
  • The IRS found no correlation between community benefit expenditures and per capita income levels of the area surrounding the hospital.
  • Community benefit expenditures increased as the level of uninsured in the area surrounding the hospital increased.  

Executive Compensation  

  • Most of the hospitals complied with the requirements and procedures for rebuttable presumption under the excess benefit transaction rules.  
  • The average annual compensation paid to top management was $490,000 and the median was $377,000, with the highest compensation paid by high population and other urban and suburban hospitals. Both average and median compensation increased with the hospital’s revenue size.  
  • The annual compensation was significantly higher at the 20 hospitals selected by the IRS for examination, with the average at $1.4 million and the median at $1.3 million.  
  • Most of the executive compensation amounts were found to be reasonable based on comparability data.  

Implications for Hospitals  

  • The Final Report provides hospitals with a valuable tool to assess their community benefit and executive compensation programs and evaluate these programs against their peers.  
  • The Final Report provides data by which nonprofit hospitals can compare their community benefit activities and executive compensation practices to other hospitals and prepare for completion of their upcoming Form 990, including Schedule H.  
  • Notwithstanding the fact that hospitals for the most part complied with the rebuttable presumption procedures and paid compensation that was reasonable compared to other hospital, the IRS noted that the compensation may appear to the public to be too high. This suggests that the IRS may review the rebuttable presumption regulations to assess whether they are an effective tool for monitoring compensation levels.  
  • Senator Grassley appears to remain dissatisfied with the level and kind of scrutiny of nonprofit hospitals. He has criticized the IRS for failing to impose a quantitative standard for community benefit (i.e., a percentage of revenues devoted to community benefit). He also criticized the Final Report for failing to provide a comparison to for profit hospitals.
  • The Final Report showed significant variation among the sampled hospitals. In the future, the IRS is likely to place more focus on other factors, such as the location of the hospital, the level of uninsured and income levels in surrounding areas, as well as the specific practices of the hospital in evaluating community benefit and executive compensation.