The IRS began its Hospital Compliance Project in May 2006 by first selecting 544 nonprofit hospitals through a review of the Forms 990. The IRS mailed those hospitals a comprehensive questionnaire, Form 13790, which was 9 pages long prior to adding the requested narrative responses. After receiving completed questionnaires from 487 of those hospitals, the IRS compiled the data in a 178 page report, entitled “IRS Exempt Organizations (TE/GE) Hospital Compliance Project Final Report” (IRS Hospital Report) which was released on February 12, 2009. The IRS Hospital Report is available at and contains many graphs and tables reporting data related to “community benefit” as variously defined by the hospitals, and executive compensation. As explained by one of the IRS' officials involved in the project, the goal of the compliance project was not to come to any conclusions, but to provide data and benchmarks for purposes of the continuing healthcare debate.1 In addition, the report furthered the IRS' understanding of the healthcare industry and allowed the IRS to develop a more targeted "Schedule H", the extensive healthcare schedule that will be completed by Hospitals filing the revised 2008 Form 990.2 In addition, Sen. Charles Grassley recently commented that he and Chairman Thomas3 share a joint interest in tax-exempt hospitals, and believe in “strengthening the charitable sector by making charities more accountable for the significant tax breaks bestowed on them in the tax code”.4

Community Benefit Standard

The IRS compiled substantial data from all types of hospitals, to determine the different categories and levels of community benefits that are offered by the hospitals. The IRS classified the four types of community benefit expenditures as including uncompensated care, medical education and training, research and community programs.5 The community benefits varied by size of hospital, population of surrounding area, and type of hospital. Unfortunately, without a standard definition of uncompensated care, the reporting hospitals included different items in that category.6 Some hospitals included Medicare and Medicaid shortfalls and bad debt, while others did not and so there is some criticism that the results are not entirely accurate.7 In any event, the IRS summarized that the overall average of total revenues spent on aggregate community benefit expenditures, as variously reported by the hospitals, was 9% with the median at 6%.8 The IRS also estimated that the overall average and median percentages of uncompensated care as a percentage of total revenues was 7% and 4%.9 However, within those averages the amount of community benefit expenditures per individual hospital varied widely. Thus, although the IRS has stated it did not come to any conclusions as a result of this study, they did conclude that an arbitrary percentage as a measure of the acceptable quantity of community benefit is not advisable and is not recommended. There were too many legitimate variables among the hospitals, which would make such an arbitrary “bright-line” test unworkable.10 One positive result from this learning process, is that the Schedule H that will be filed in future years specifically asks for the various types of uncompensated care by category, and so that the data for “community benefit” will be more precise.

Executive Compensation

The IRS Hospital Report also analyzes executive compensation, as variously reported by the hospitals. Not every hospital answered every question, and so the results are of mixed accuracy.11 Overall, the average compensation for all hospital executives whose income was included in the hospitals’ responses on the questionnaire was $490,000. The IRS conducted 20 examinations as a result of the responses it received, to review whether any of the 20 selected hospitals were providing excess compensation to their executives. The 20 examined hospitals reported average total compensation for all listed hospital executives at $801,720, with the average compensation for a CEO at $1.4 million. The IRS reports that the "organizations met the requirement of the rebuttable presumption process in 85% of the examined hospitals.”12 Since the examined hospitals used comparability data and independent personnel to review and establish executive compensation amounts, the rebuttable presumption was satisfied and the compensation was determined by the IRS to be reasonable, since the IRS apparently did not feel it would have been able to overcome its burden of proving otherwise. In a D.C. Bar Tax Section presentation on February 26, 2009, several of the government panelists indicated that the rebuttable presumption standard is under review and could be revised or abolished through legislation or a withdrawal of the Treasury regulations. Also, the initial contract exception to section 4958 came under much criticism. The consensus of the government speakers seemed to be that the rules are too generous to the taxpayer and allow as reasonable, compensation which might otherwise be determined to be excessive. Roger Colinvaux, formerly the Joint Committee on Taxation’s legislation counsel with the Joint Committee until May 2008, called the rebuttable presumption and initial contract exception “gifts” to taxpayers.13 However, as long as the Treasury Regulations are in effect, hospitals and all section 501(c)(3) and section 501(c)(4) organizations should protect their interests and take full advantage of the “gift” of the rebuttable presumption in order to protect the hospital’s interests and the interests of its executives.

Senator Grassley has recently stated that he hopes to introduce legislation, possibly as part of the upcoming healthcare reform legislation, which would put more pressure on boards of directors of nonprofit hospitals to keep salaries in check. He is also considering whether to try to change the Treasury regulations to shift the responsibility to the hospital board to prove a salary is reasonable.14 That change in the regulations would effectively abolish the rebuttable presumption.

The Senate Finance Committee has expressed its desire for a similar study of for-profit hospitals so that the two sets of data can be compared and contrasted. Theresa Pattara, tax counsel on the Republican staff of the Senate Finance Committee, stated at the DC Bar luncheon that there is a need for a non-profit hospital to differentiate itself from its for-profit rivals, in order to justify its favored tax exempt status, including the advantages it obtains with its ability to utilize tax exempt bonds. If a nonprofit hospital is operated similarly to a for-profit hospital, its tax exempt status may be in jeopardy. Any such hospital should take proactive steps now to increase its level of community benefits, in addition to taking advantage of the rebuttable presumption to ensure that executive compensation is protected. Any change in the regulations would likely not be retroactive.