Sunday, May 18, 2014

If the hospital's nonprofit, the CEO may not be

Updated, 5/19:

A footnote to Elisabeth Rosenthal's story in today's Times about how huge pay packages for hospital executives contribute to high U.S. healthcare costs: Exhibit A was Ronald Del Mauro, the just-retired president of the nonprofit New Jersey hospital group Barnabas Health, who was paid $21 million in deferred compensation, bonus and incentive pay in his final year.

The footnote concerns an explanation from a Barnabas spokesperson:
Ms. Greene also said Barnabas’s compensation program follows I.R.S. rules and is established by an executive compensation committee with “guidance from a nationally recognized compensation consultant.”
That jogged memory of a related factoid. Mr. Del Mauro was not only paid in accordance with advice from a consultant: he was also paid as a consultant, at least as of the end of 2012.

In 2006, the Times' David Kocieniewski covered Barnabas' $265 million settlement of a federal suit alleging that the hospital group "bilked the federal government of at least $630 million from 1995 to 2003" via Medicare overbilling. The story implies without confirming that prosecutors were also scrutinizing Barnabas' payment of top executives, at a time when "Hundreds of nonprofit hospitals across the country are being scrutinized by the Internal Revenue Service and examined by Congress to determine whether they are following guidelines that forbid tax-exempt entities to give executives excessive compensation."  In that context, the Times reported a procedural maneuver worth pausing over:
Mr. Del Mauro gets no compensation from St. Barnabas Hospital Center, according to its public filings, but he and two other senior administrators are paid officers of SBC Management, a profit-making company that does business with the hospital center. That sort of arrangement is common in the hospital industry.
Barnabas's 2012 Form 990, the return for a tax-exempt organization, spells out the relationship with SBC Mangement Corporation in Schedule O (p. 71).  Barnabas Health Inc., the parent company of Barnabas Health, owns 100%  of  SBC, which employs Barnabas personnel with the title of Vice President and above, of whom there are several dozen. Some employees are paid by other affiliates. Barnabas Health itself, "a tax-exempt  integrated healthcare delivery system," has no paid employees [update added 5/19].

Do such "common" arrangements enable nonprofit hospitals and hospital groups to sidestep the laws governing compensation for tax-exempt organizations? I'd like to try to find out.

Readers, if you have any knowledge of this type of arrangement between hospitals and management consultancies, or pointers regarding people to talk to, I'd appreciate hearing from you.

Update 2 (5/19): one motive for paying nonprofit hospital executives through a for-profit subsidiary may be to gain the ability to offer more forms of deferred compensation and incentive pay.  In a 2006 paper, "Taxable Subsidiaries of Tax-Exempt Organizations," published by the Association of Corporate Counsel, Timothy B. Phillips of the American Cancer Society outlined the rationales for such an entity:
As a general matter, a taxable entity has more flexibility in the area of compensation than an exempt organization. Some exempts may have explicit or implicit caps on employees’ salaries to reflect the mission of the organization or to keep high salaries from discouraging donations. A taxable entity can also offer particular kinds of compensation to employees that are not available to tax-exempt employers, such as certain deferred compensation arrangements, participating stock, stock appreciation rights, and options of all kinds.27 [link goes to a 2002 Urban Institute paper with near-identical language].

A taxable subsidiary may be better able to attract and maintain a professional staff by offering these various types of compensation packages that would normally be unavailable for the tax-exempt. The IRS provided some guidance in the area of flexibility in compensation in Private Letter Ruling 200225046 (Mar, 2002). In this ruling, the IRS reviewed whether taxable subsidiary’s grants of stock to its employees would violate the prohibitions against private inurement that applied to the exempt parent. The IRS determined that so long as the compensation remained reasonable, the subsidiary’s grant of such interests would not be considered contrary to the parent’s exempt purpose or jeopardize the parent’s tax-exempt status.28 The available compensation arrangements for employees of a taxable subsidiary are not unlimited, however. Section 162 of the Code subjects such compensation to the requirement that the amount paid not exceed a reasonable salary or wage.29
Barnabas offers extensive deferred compensation and a supplemental executive retirement plan to numerous executives. 

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