Nonprofit Health Related CEO Compensation

Health Insurance Company CEOs in the U.S. earned tens of millions in 2008, but what about nonprofits? If you guessed that nonprofit CEOs are paid less than their private sector counterparts, you are right. But the numbers are no less shocking to the average American. Below are the highest paid nonprofit workers at the largest nonprofit healthcare organizations, hospitals and medical centers in the U.S, courtesy of the Chronicle of Philanthropy.

Last year, some of the top paid nonprofit workers took pay cuts while others saw increases in compensation. Despite a global recession, many health-related nonprofits reported higher income in 2008, according to the report by The Chronicle of Philanthropy, which surveyed compensation information from the top 400 charities and foundations in the U.S.

According to the Chronicle, it asked each organization to answer a questionnaire and provide its most recent 990 tax form. This year, not every organization provided the information. In fact, most of the top paid executives from 2007 did not provide the information in 2008.

Based on 2007 data, the highest paid nonprofit worker was Herbert Padres, chief office of New York-Presbyterian Hospital. Padres earned  $6,170,885 in 2007. That’s $118,671 per week. In some parts of the country, that is enough to purchase a home. Every week. It is certainly enough to purchase one of the finest cars on the market.

As we’ve noted before on this blog:
Under the strictures of 501(c)(3) nonprofits are confined to paying executives “reasonable compensation” and supplying “community benefit.” Unfortunately, neither of these terms are particularly well defined. In [this] study’s executive summary, the IRS puts it so:

“The community benefit standard is the legal standard for determining whether a nonprofit hospital is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.”

“Observations. Both the community benefit and reasonable compensation standards have proved difficult for the IRS to administer. Both involve application of imprecise legal standards to complex, varied and evolving fact patterns.”

The varied and evolving fact pattern of nonprofit executive compensation looks something like this:

The nonprofit healthcare CEO with the highest salary in 2008 (given the incomplete response) was James J. Mongan, CEO of Partners HealthCare Systems. Mongan earned $3,376,554 in 2008.

Nonprofit executive compensation, health-related nonprofit:
New York-Presbyterian Hospital Herbert Pardes (CEO): $6,170,885
Memorial Sloan-Kettering Cancer Center Harold Varmus (CEO): $3,677,402
Partners HealthCare System James J. Mongan (CEO): $3,376,554
New York Presbyterian Hospital Steven J. Corwin (COO): $3,127,051
Mount Sinai School of Medicine Samin Sharma (Professor of Medicine and Cardiology): $2,894,580

Note: Aside from James J. Mongan, all numbers are for the 2007. Compensation amounts include deferred compensation and fringe benefits.

See Health Insurance CEO Compensation Here.

Sometimes It’s Better Not to be Ranked #1

The Chronicle of Philanthropy lead off its annual executive compensation story with the headline that “Nearly three in 10 of the leaders of the nation’s biggest charities and foundations have taken pay cuts in the past year as the recession causes donations to drop and batters endowments”.

USA Today interpreted the annual survey results differently, with yesterday’s headline: “Non-profit execs make millions: Big organizations have highly paid leaders,” coupled with the usual USA Today chart, this one listing the leaders of the pack, compensation-wise.  The accompanying article questioned why nonprofit compensation is so high.

How much is too much is a fair question, and one readers of this blog will recall that Attorney General Ann Milgram is asking about Stevens Institute’s President.  The ubiquitous Senator Grassley thinks non-profit salaries are too high, and is using health care reform as an opportunity for reforming more than the health sector — one of the 500+ amendments to the Baucus healthcare reform bill comes from Grassley, who wants to eliminate the presumption of reasonableness afforded federally tax exempt organization salaries as long as boards obtain inter alia a comparability study (which unsurprisingly, most do).

According to a recent IRS hospital study, “Although high compensation amounts were found in many cases, generally they were substantiated based on appropriate comparability data”.  The IRS is currently focusing on salaries at colleges and universities.   Somewhat unclear is whether the comparability study may include salaries from the business sector — the IRS has waffled so far, but then-New York Attorney General Spitzer was pretty clear in his mind that it was improper for Richard Grasso’s friends on the compensation committee to have relied on for-profit numbers when it came to setting Grasso’s $187 million compensation package as head of the then-nonprofit NYSE.

Some are outraged by non-profits’ salaries, which are, after all, subsidized by donors and the tax-payer, while others think that politicians should let nonprofit boards run their own show.  The argument is that nonprofits have to compete with the business-world for the best talent.

Is there any law on the subject?  Yes, but it’s rarely enforced.  State nonprofit corporate law contains a non-distribution constraint–that is, nonprofits can’t pay out dividends or excessively pay its employees or those with whom they do business — the money is supposed to be used to further the entity’s mission.  On the tax side, federal law prohibits private inurement and excess benefit, which essentially seeks to accomplish the same goals.  So, on the one hand, critics of excessive compensation do have a legal leg to stand on. On the other, all anyone seems to do about the issue is complain - neither the IRS nor state AG’s have boards particularly concerned about their compensation decisions.  In fact, all boards have to do is follow the right procedure, and their CEO salaries are presumptively reasonable.  So, if all non-profits essentially use the same small group of compensation consultants, and set salaries coincidentally high, then it’s a self-reinforcing system and nobody gets in trouble.

I have little hope that the real questions will be seriously considered, which include what the role of the nonprofit is in our society, and what we expect of nonprofits in exchange for their not having to pay taxes, and for their donors getting tax deductions.  The IRS has begun collecting information on the revised 990 about hospital “community benefit”, but the real question is whether any real change will come out of the whole thing, and whether it will go further than health care.  Nudge would suggest that merely by asking the right questions behavior will change!  I’m more in the Grassley camp of being a noodge….

Nonprofit Hospital Tax Exemptions Worth $638 Million, Exceed “Community Benefit” by $373 Million for 10 Nonprofit Hospitals in Massachusetts

In recent posts we’ve pointed out some of the questionable characterizations of “community benefit” by nonprofit hospitals under 501(c)(3), a portion of the Internal Revenue Code which garners tax exemptions for those entities, such as nonprofit hospitals, which it harbors. In particular, we’ve focused on how matters such as “bad debt,” Medicare “shortfalls,” and even Private Insurer “shortfalls” have often been construed by nonprofit hospitals to constitute the conveyance of a community benefit. A “shortfall” may be deemed to have occurred when although the hospital receives the amount it had agreed to with a Private Insurer, or which was designated by the government through Medicare, that amount is less than the hospital’s “list price” for such a services.

Despite this rather lax standard, Kaiser.org reports that an in-depth review by the Boston Globe determined that “the value of abundant tax exemptions extended to Massachusetts General Hospital, and other private non-profit hospitals, ‘far exceeds the amount the state’s leading hospitals spend on free care for the poor and other community benefits.’”

Kaiser reports that in Massachusetts

The ten biggest hospitals in the state benefited from $638 million in tax breaks in 2007, but reported only $265 million in “community benefits” provided that year, the Globe found.

Even if one accepts the questionable characterizations of community benefits, that still leaves an excess of $373 million in tax exemptions–for merely 10 hospitals–in only one state.

Grassley and Baucus Seek to Further Define the Difference Between Charity Care and Bad Debt for Nonprofit Hospitals. As a Matter of Collections Timing?

According to Inside ARM, an accounts receivable management online magazine, the Senate Finance Committee is presently contemplating imposing strictures upon nonprofit hospitals regarding when those hospitals may outsource the collection of unpaid bills and, presumably, the definition of “bad debt” as it relates to “community benefit.” Inside ARM states that “The proposal is meant to provide more free care and make not-for-profit hospitals more accountable for their tax-exempt status.”

Details of the initiative are said to be scant at this point, but according to Inside ARM, “Committee Chairman Max Baucus of Montana and Chuck Grassley of Iowa, the committee’s top ranking Republican, propose requiring not-for-profit hospitals to follow certain procedures before initiating collection actions against patients.” Sen. Grassley has sought to require nonprofit hospitals to justify their tax exemptions since 2005, the year in which he sent what pretty much amounts to interrogatories to the nation’s leading nonprofit hospitals regarding billing practices and questionable characterizations of “community benefit.”

Although without detail, the new timing distinction for collections seems to be based upon the amount owed being designated as “bad debt,” or that which is essentially deemed “uncollectable.” The prospective prohibition would seem to  require the amount owed to be deemed “uncollectable” or “bad debt” before it can be placed with a collection agency. A prospect the nation’s collectors, who generally work on commission, do not relish. But one hopes this provision is but one small piece of further defining “community benefit” in terms of actual charitable care.

Many nonprofit hospitals have characterized their uncollected receivables as a fulfillment of the ill-defined requirement that they offer a “community benefit” in exchange for the tax exemption they receive under 501(c)(3). Senator Grassley has said that “Neither the IRS nor Congress has done a very good job when it comes to establishing the criteria for enjoying this tax status since the IRS scrapped charity care for its community benefit standard in 1969″ (New York Times, 2/13/09).”

He has a point. But unless the prospective timing provision for outsourcing only “bad debt” is coupled with a prohibition upon characterizing mere “uncollected receivables” and  payor “shortfalls” as “community benefit,” it is hard to see what effect this bad debt collections distinction will have–besides the expansion of in house hospital collection  departments. One hopes that the pointed questions Senator Grassley asked of the nation’s leading nonprofit hospitals in ‘05 will play a substantial role in the Senate effort to reform and redefine the obligations of tax exempt nonprofit hospitals now. I believe Mr. Grassley would well agree that a mere shift in the locus of collection activities will not constitute reform worth the name.

Perhaps some background is in order. As we posted here a little while back in “The IRS, Nonprofit Hospitals, and the Meaning of “Community Benefit,” the IRS recently published the results of a two year study of nonprofit hospitals functioning under 501(c)(3), a portion of the Internal Revenue Code which garners tax exemptions for those entities it harbors. For those of you who have not yet read our post on the topic, I’ve excerpted it here below (if you have already read the piece, you can scroll down to the paragraph before Grassley’s numbered questions for the concusion to this post). The excerpted post describes how uncompensated care, bad debt and “shortfalls” in payments from Medicare and even Private Insurers can, and often are, characterized as somehow providing a “community benefit” which justifies a tax exemption for nonprofit hospitals:

Under the strictures of 501(c)(3) nonprofits are confined to paying executives “reasonable compensation” and supplying “community benefit.” Unfortunately, neither of these terms are particularly well defined. In the study’s executive summary, the IRS puts it so:

“The community benefit standard is the legal standard for determining whether a nonprofit hospital is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.”

“Observations. Both the community benefit and reasonable compensation standards have proved difficult for the IRS to administer. Both involve application of imprecise legal standards to complex, varied and evolving fact patterns.”

These limitations may be seen in the characterizations of “community benefit” available to the hospitals in the study. Bad debt and Medicare payment shortfalls may be construed as  “community benefit.” As the debt, the credit injury, and the collection calls all inure to the community member who received treatment but could not pay, one might question if the “community benefit” involved in a failure of collection practices might be distinguishable from the “community benefit” involved in intentional charitable care. In addition, there simply is no set criteria to determine the appropriate amounts to be charged as “community benefit.” The IRS study poses the following under the heading of

“Limitations: …although the IRS designated the general categories of activities that could be reported as community benefit for purposes of the study, determining what was treated as community benefit (for example, bad debt or Medicare shortfalls) and how to measure it (cost versus charges) was largely within the respondents’ discretion.

Which is to say that those being monitored (nonprofit hospitals) to gauge the amount of money spent– to justify their tax exempt  status– were free to characterize their contributions in the manner they thought best.

Medicare shortfalls: So… if a non-profit hospital has a fee schedule rate of $100 for a procedure, and Medicare has a reimburse rate of $80 for that procedure, if a “charge” rate of measurement is used then there has been a $20 “community benefit” if the federally designated tax exempt nonprofit hospital accepts as payment the federally designated and predetermined Medicare reimbursement amount. Significantly, 19% of the hospitals also claimed “shortfalls” in payment from private insurers as uncompensated care/community benefit (See Chart: “Figure 82,” p. 105, full report).

Cost vs. Charge: So… if a procedure has a cost to the hospital of $80 and a fee schedule [or "chargemaster"] rate of $100, and the recipient of the procedure does not pay and the hospital categorizes the non-payment as “bad debt,” it has the ability to count as “community benefit” not only the cost of its unintended largesse, but also the amount it had expected as profit.

Perhaps even more telling than this latitude in characterization are the amounts actually submitted to the IRS as community benefit. Here are a few of the findings:

• The average and median percentages of total revenues reported as spent on community benefit expenditures were 9% and 6%, respectively.
• Uncompensated care accounted for 56% of aggregate community benefit expenditures reported by the hospitals in the study.

Read more

The IRS, Nonprofit Hospitals, and the Meaning of “Community Benefit”

Kaiser.org has written an interesting article about the recent two year IRS Study of nonprofit hospitals under 501(c)(3). The IRS queried 5oo nonprofit hospitals, with the study’s findings based primarily upon examination of 489 of those. Under the strictures of 501(c)(3) nonprofits are confined to paying executives “reasonable compensation” and supplying “community benefit.” Unfortunately, neither of these terms are particularly well defined. In the study’s executive summary, the IRS puts it so:

“The community benefit standard is the legal standard for determining whether a nonprofit hospital is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.”

“Observations. Both the community benefit and reasonable compensation standards have proved difficult for the IRS to administer. Both involve application of imprecise legal standards to complex, varied and evolving fact patterns.”

The Kaiser article notes that according to the NY Times, “Lawmakers over the last few years have ‘raised concerns over whether nonprofit hospitals provide enough free care and other community benefits to justify their tax exemptions,’ but no test exists for ‘measuring how much community benefit is enough or even what constitutes community benefit.’”

These limitations may be seen in the characterizations of “community benefit” available to the hospitals in the study. Bad debt and Medicare payment shortfalls may be construed as  “community benefit.” As the debt, the credit injury, and the collection calls all inure to the community member who received treatment but could not pay, one might question if the “community benefit” involved in a failure of collection practices might be distinguishable from the “community benefit” involved in intentional charitable care. In addition, there simply is no set criteria to determine the appropriate amounts to be charged as “community benefit.” The IRS study poses the following under the heading of

“Limitations: …although the IRS designated the general categories of activities that could be reported as community benefit for purposes of the study, determining what was treated as community benefit (for example, bad debt or Medicare shortfalls) and how to measure it (cost versus charges) was largely within the respondents’ discretion.

Which is to say that those being monitored (nonprofit hospitals) to gauge the amount of money spent– to justify their tax exempt  status– were free to characterize their contributions in the manner they thought best.

Medicare shortfalls: So… if a non-profit hospital has a fee schedule rate of $100 for a procedure, and Medicare has a reimburse rate of $80 for that procedure, if a “charge” rate of measurement is used then there has been a $20 “community benefit” if the federally designated tax exempt nonprofit hospital accepts as payment the federally designated and predetermined Medicare reimbursement amount. Significantly, 19% of the hospitals also claimed “shortfalls” in payment from private insurers as uncompensated care/community benefit (See Chart: “Figure 82,” p. 105, full report).

Cost vs. Charge: So… if a procedure has a cost to the hospital of $80 and a fee schedule rate of $100, and the recipient of the procedure does not pay and the hospital categorizes the non-payment as “bad debt,” it has the ability to count as “community benefit” not only the cost of its unintended largesse, but also the amount it had expected as profit.

Perhaps even more telling than this latitude in characterization are the amounts actually submitted to the IRS as community benefit. Here are a few of the findings:

• The average and median percentages of total revenues reported as spent on community benefit expenditures were 9% and 6%, respectively.
• Uncompensated care accounted for 56% of aggregate community benefit expenditures reported by the hospitals in the study.
• Uncompensated care was the largest reported community benefit expenditure for each of the study’s demographics, other than for a group of 15 hospitals reporting large medical research expenditures (93% of all research expenditures reported by the study’s respondents).
• Further, the group of 15 hospitals reporting large medical research expenditures materially impacted the overall numbers in this area. For example, when the research group is removed, the percentage of total community benefit expenditures reported as spent on uncompensated care increases from56% to 71%, and that spent on medical research decreases from 15% to 1%.
• Uncompensated care and community benefit expenditures were concentrated in certain hospitals and unevenly distributed. For example,9% of the hospitals reported 60% of the aggregate community benefit expenditures of the overall group; 14% of the hospitals reported 63% of the aggregate uncompensated care expenditures.

So… if we were to take the 15 research hospitals out of the mix, 73% of the “community benefit” for the remaining 474 hospitals was in the form of uncompensated care–Medicare (and private insurance) shortfalls and bad debt inclusive.

In addition, of the substantial uncompensated care component, hospitals contributions were disparate: 14% of the hospitals reported 63% of the total–which is to say that roughly 68 hospitals out of the 489 accounted for 63%, while the other roughly 421 hospitals chipped in a somewhat less magnanimous 37% of the total. This despite the considerable latitude in characterization.

The Kaiser article notes that according to the NY Times

“In a statement, Sen. Chuck Grassley (R-Iowa), who since 2005 has sought to require not-for-profit hospitals to justify their tax exemptions, said that the study did not include adequate definitions or comparable information on community benefits for-profit hospitals provide. He said, “Neither the IRS nor Congress has done a very good job when it comes to establishing the criteria for enjoying this tax status since the IRS scrapped charity care for its community benefit standard in 1969″ (New York Times, 2/13)”

California Foundations Advocate for Health Care Reform

The Los Angeles Times reports that “Nonprofits have dropped their usual detachment to crusade for healthcare reform in California, opening Sacramento offices staffed by former aides to lawmakers.” Apparently not satisfied with the results garnered through “years of financing studies and demonstration projects,” “California philanthropic foundations and think tanks are shedding their traditionally detached stances to crusade for healthcare reform in the state Capitol and in Congress.”

To lead this crusade, a number of foundations have hired high profile figures to advocate their ideas to policy makers, and, in some instances, foundations have promoted those ideas to the wider public as well. In defense of the practices, the LA Times reports that “Foundation leaders emphasize they have no interest in direct lobbying and that they promote ideas that are based in evidence, not ideology.”

Paul Brest, “president of the William and Flora Hewlett Foundation in Menlo Park and author of a book on philanthropic strategies” is quoted as saying: “What I’ve seen is foundations moving from thinking all we needed to do is support good research in the field and the rest will happen to realizing that unless we are going to support organizations to take the research and try to turn it into policy, then the research is going to sit in the bottom of a pile somewhere.”

Beware the IRS
The article also points out, however, that “Advocacy is risky for foundations, since most are categorized by the IRS as 501(c) nonprofits, which restricts them from direct lobbying or participation in partisan politics.” The experts of “The New America Foundation, a Washington, D.C.-based think tank underwritten by foundations,” are said to have “so much contact with lawmakers that the foundation requires them to keep track of their hours to ensure they do not exceed lobbying limits set on nonprofits.”

Despite the risks, the LA Times reports that “With billions of dollars at their disposal, the foundations are seeking to become bigger players.” Read full story here.