April 17, 2012

Best Practices for Hospital Board Compensation

The Internal Revenue Service (“IRS”) continues to focus on tax-exempt hospital board governance and compensation. In light of increased scrutiny, hospitals should adhere to board of directors “best practices,” especially when physicians serve as board members. The following questions should help your organization establish compliant board composition, governance policies and procedures, and compensation:How many board members are considered independent?
The IRS says that a tax-exempt organization with an independent governing body and well-defined governance mitigates opportunities for excess benefit transactions, inurement, and other activities inconsistent with a non-profit’s exempt mission. The Panel of the Nonprofit Sector, as indicated in its Principles for Good Governance and Ethical Practice, recommends that at least two-thirds of a tax-exempt organization’s board be independent.

Has the board adopted the governance policies and procedures recommended by the IRS?
The IRS annually reviews the organization’s Form 990, Return of Organization Exempt from Income Tax, to determine whether the organization has implemented and is currently adhering to policies relating to reasonableness of compensation, conflicts of interest, documentation of governance decisions, and many other governance procedures.
Do physicians participate on the compensation committee?
The board compensation committee should limit (and consider excluding) any physicians that receive compensation from the tax-exempt organization in accordance with specific IRS recommendations. Furthermore, a sub-committee of the board that makes physician compensation recommendations to the full board should be comprised of a majority of independent members or should otherwise disclose that certain members have recused themselves due to conflicts of interest or other independence concerns.Does the board regularly evaluate compliance with the conflicts of interest policy?
The board should regularly assess its compliance with a written conflicts of interest policy. Additionally, board minutes should reflect when conflicted members recuse themselves from discussions and votes.
Is the organization complying with independent reviews of compensation for officers, directors, key employees, and physicians?
An annual independent review of compensation should be conducted for officers, directors, and key employees, including compliance with the rebuttable presumption of reasonableness as it relates to compensation of disqualified persons. By comparison, it is recommended that all physician relationships (whether or not they serve on the board) be reviewed regularly to insure the arrangements are commercially reasonable and fair market value.
For additional information regarding “best practices” for hospital governance, please contact the experts listed below or at PYA, (800) 270-9629.

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