GAO Survey on Executive Compensation at Nonprofit Hospital System

(Tax Planning Alert dated August 7, 2006)


As part of Congress’s efforts to oversee the activities of the nonprofit sector, the House Ways and Means Committee requested that the Government Accountability Office (“GAO”) conduct a study of executive compensation issues at nonprofit hospital systems. The goal of the study was to gain an understanding of the policies and practices related to the salaries, benefits, travel, gifts and entertainment expenses paid to executives by such hospital systems. Key questions to be reviewed included the following:

• What corporate governance structure do selected hospital systems report as having in place over executive compensation?
• What is the basis for the compensation and benefits earned by, awarded to, or paid to the executives as reported by selected hospital systems?
• What internal controls do selected hospital systems report as having in place over the approval, payment and monitoring of executive travel and entertainment expenses, gifts and other perquisites?

The GAO conducted its study of executive compensation at nonprofit hospital systems from June 2005 through June 2006, which consisted of developing and administering a survey of the top 1001 private (i.e., non-governmental), nonprofit hospital systems and following up on survey responses that were unusual, incomplete or inconsistent. In June 2006, the GAO briefed the staff of House Ways and Means Committee Chair William M. Thomas (R-CA) on the results of the study and on July 28, 2006, the GAO publicly issued the results of the study (GAO-06-907R Nonprofit Hospital Systems – see complete copy attached).

While the GAO study served only as an information gathering measure and did not provide any opinion or conclusion regarding the items surveyed,2 the published results of the study are helpful in highlighting a number of common practices and procedures utilized by nonprofit hospital systems. Common practices identified included:

• Having an executive compensation committee or entire board review executives’ base salary, bonuses and perquisites.
• Having a conflict of interest policy covering members of the compensation committee and compensation consultants.
• Relying upon market data to determine comparable compensation and benefit levels.

If you would like to discuss the GAO study or if you are interested to know how your system’s governance and internal controls for executive compensation compare to the GAO survey responses, please contact Eddie Phillips, Terry Haefner or Debbie Ernsberger at (800) 270-9629.

[1] Identified by the GAO from the American Hospital Association’s AHA Guide 2005 .
[2] The GAO noted in its report that it did not seek to validate any responses provided by the nonprofit hospital systems and the GAO did not issue any opinions or conclusions regarding the adequacy or sufficiency of the surveyed policies, practices or procedures with respect to compliance with applicable laws and regulations.

WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW.  THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION.  EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

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