Volume Eleven Number Four April 2009 Published Monthly Earn CEU Credit www . hcca - InfO . Org / quIz , see page 27 Meet Kathleen B. Roberts OIg issues three Corporate Compliance and reports on adverse Privacy Officer, Baptist Health events at hospitals page 14 page 4 HCCA is going green Feature Focus: HCCA conference attendees will NOT automatically Executive receive conference binders. If you would like to purchase conference binders, please choose that option on your compensation in conference registration form. Attendees will receive electronic access to course materials prior to the conference troubled times— as well as a CD onsite with all the conference materials. Part 2 page 30
Health Care Compliance Association • 888-580-8373 • www.hcca-info.org executive compensation, the scope and implications of increased transpar- – Part 2 fjduciary duties and promote the best interests of their organization. help defend against IRS audits and help directors and offjcers fulfjll their compensation reviews. It described how having a solid process in place can tance of a good governance process, including well documented executive ency in compensation in the nonprofjt healthcare sector, and the impor- Executive compensation in troubled times feature at ggriffjth@jonesday.com. Day where he practices as a member of the Health Care and Tax Practice Editor’s note: Gerald Griffjth is a partner in the Chicago offjce of Jones This article, published in the April 2009 issue of Compliance Today, focus appears here with permission from the Health Care Compliance Association. Call 888/580-8373 with reprint requests. By Gerald M. Griffith, JD Use of for-profit comparables Current law clearly allows use of both for-profjt and nonprofjt compen- sation packages as comparables in the executive compensation review process. 3 Use of for-profjt comparables has been criticized by some, and Groups. He may be reached by telephone at 312/269-1507 or by e-mail noted to be a possible area of Congressional concern by IRS representa- tives. 4 Nevertheless, it remains a defensible practice under current law. Despite these potential concerns, the IRS has not yet gathered any Part 1 of this article appeared in the March 2009 issue of Compliance empirical data on the use of for-profjt comparables. For example, the Today . Part 1 addressed the efgects of signifjcant economic pressures on Hospital Report notes that 100% of the 478 nonprofjt hospitals that responded to the survey reported using nonprofjt comparables; but the questionnaire did not ask about use of for-profjt comparables. 5 Although the arguments in favor of including for-profjt comparables generally are stronger for executives employed directly by nonprofjts (when comparables include both for-profjt and nonprofjt companies), there may be unique situations where nonprofjt positions are not truly Appropriate comparability data comparable. For example, in the high tech area, for organizations Following the appropriate process for establishing executive compensa- that are developing cutting edge technology and competing with the tion is certainly a key element of compliance, and the fjnal report private sector for the same talent, it may be appropriate and necessary on the 2006 IRS Hospital Compliance Project (Hospital Report) to create a compensation package to match the stock options and notes that nearly all nonprofjt hospitals surveyed reported that they other attractive incentive compensation plans in the private sector. 6 follow the rebuttable presumption procedure. 1 Yet that is only half For most hospitals, however, a for-profjt-only base of comparables the story. Even with the right process in place, a compensation plan is likely too narrow, unless perhaps the hospital is located in an area can yield what some may view as excessive amounts, and thus subject dominated by for-profjt hospitals or is evaluating the compensation of the organization to intense (and expensive) scrutiny on audit and executives who have signifjcant responsibility for a program or division potentially lead to excise tax liability for excess benefjts for those same that competes primarily with for-profjt companies (e.g., technology executives. To complete the documentation and ensure compliance, it development). Another potential basis for relying more heavily on for- is also important to focus on the amounts generated under the plan as profjt comparables would be an “enterprise theory” of value, looking compared to market comparables. Tie importance of that documenta- at an entire group of related entities as a single business enterprise. Tie tion is underscored by the audit selection process used by the IRS in enterprise theory may apply to more complex health care systems that auditing nonprofjt hospitals for executive compensation issues that have a variety of for-profjt operations and joint ventures (e.g., man- afgect the top one to fjve highest paid executives. In that regard, the aged care, international facilities, technology transfer, renown research Hospital Report notes that 20 of the surveyed hospitals were selected facilities), where the skills and experience required of senior manage- for examination for potentially excessive compensation based on ment are more comparable to those found in executives of substantial relatively higher levels of executive compensation for the size and type for-profjt enterprises. Tie IRS, however, has not addressed that theory of organization as compared to other surveyed hospitals. 2 in any published ruling to date. April 2009 30
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