IRS Exempt Organizations Hospital Study – Final Report Issued

Posted by Bart Walker in February 16th, 2009

On February 12, 2009 the Internal Revenue Service (“IRS”) issued its final report on non-profit hospital community benefit and executive compensation practices. This final report is the culmination of a 3 year effort by IRS to assess the amount of community benefits actually conferred by non-profit, tax-exempt hospitals as well executive compensation levels. IRS began gathering information in 2006 by sending questionnaires to more than 500 hospitals.

In order for an entity to qualify for tax-exempt status under I.R.C Section 501(c)(3), they must satisfy a ”community benefit” standard. Some tax exempt hospital have come under fire in recent years for failing to deliver an adequate amount of charity and indigent care to justify their tax exemption. For example, in the past year, at least one hospital in Illinois has had its state tax exemption threatened due to an alleged failure to meet the community benefit standard. The IRS originally undertook this process for much the same reason – to ensure that those non-profit hospitals that enjoy a federal tax exemption are providing an appropriate level of community benefits in return.

Here are some of the key findings of the final report:

1. The average percentage of total revenues spent on community benefits: 9%

2. The median percentage of total revenues spent on community benefits: 6%

3. Rural hospitals provided less community benefits than urban hospitals (as a percentage of revenue).

4. The percentage of community benefits generally increased with the total amount of revenues.

5. Uncompensated care was the largest category of community benefits conferred (except in the 15 largest research hospitals).

6. Overall, the largest categories of community benefits were: uncompensated care (56%), medical education and training (23%), research (15%) and community programs (6%).

7. Almost all of the research expenditures were made by a small group of 15 hospitals.

8. 21% of hospitals reported total expenses greater than their total revenues.

9. Uncompensated care and community benefit expenditures were concentrated in certain hospitals and were not evenly distributed. 9% of the hospitals were responsible for 60% of the aggregate community benefit expenditures of the whole group.

10. Average total compensation paid to the top management officer: $490,000.

11. Median total compensation paid to the top management officer: $377,000.

12. Certain hospitals were surveyed specifically because they appeared to have high compensation amounts being paid to top executives. Of these 20 hospitals, the average total compensation paid to their top executive was $1.4 million. The median total compensation was $1.3 million.

A copy of the Executive Summary of the report can be found here.

The full text of the report can be found here.

The interim report, which was released in July 2007, can be found here.