IRS Releases Long-Awaited Report on Hospital Pay and Services
Feb. 12, 2009, Chronicle of Philanthropy — The Internal Revenue Service today released findings from a much-anticipated study of nearly 500 nonprofit hospitals that is sure to raise controversy over how much compensation hospitals pay to top officials and how hospitals set that compensation.
The 178-page report also looks at another controversial topic: How much hospitals do to provide charitable services to people in the neighborhoods where they are located in order to qualify for a federal tax exemption.
The IRS said the average total compensation that hospitals that responded to a questionnaire paid to their top management official was $490,000; median compensation was $377,000.
At 20 hospitals that the IRS selected for closer inspection through audits, the average total compensation paid to a top management official was $1.4-million; median compensation was $1.3-million. (The hospitals were audited because the institutions reported paying greater compensation amounts relative to their size and type.)
“Amounts reported appear high but also appear supported under current law,” the IRS said. “For some, there may be a disconnect between what, as members of the public, they might consider reasonable and what is permitted under the tax law.”
The IRS said nearly all hospitals in the study followed “important elements of” a set of federal rules in setting compensation. Those rules provide a series of steps — including the use of data to compare salaries earned by executives at similar charities and for-profit institutions — 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. Organizations that are found to pay excessive compensation are forced to pay fines, called excise taxes.
Of the audited hospitals, 85 percent met the requirements of the rebuttable-presumption process, the IRS said, putting the burden of proof on the tax agency to show that compensation was not reasonable. The IRS concluded that among this group of audited hospitals, none paid excessive compensation under the law and thus did not owe excise taxes.