Maine Hospital Association,

TO: Senator Barry Hobbins, Chair
Representative Deborah Simpson, Chair
Members of the Judiciary Committee

FROM: Mary Mayhew, Vice President

DATE: May 3, 2007

RE: Testimony in Opposition to LD 1792 - An Act To Limit the Compensation of Officers and Directors of Nonprofit Corporations

The Maine Hospital Association represents all 39 community-governed hospitals which include 36 non-profit general acute care hospitals, 2 private psychiatric hospitals, and 1 acute rehabilitation hospital. In addition to acute care hospital facilities, our hospitals represent 19 home health agencies, 19 skilled nursing facilities, 17 nursing facilities, 8 residential care facilities, and 200 physician practices.

Maine's hospitals are committed to treating everyone, regardless of ability to pay. We are the health care safety net. We are there 7 days a week, 24 hours a day. We are the foundation of acute, primary, chronic and public health care for most communities-subsidizing access to primary care physicians, pediatric practices. We are there making sure that care is available in the right settings-that there are long-term care beds in the community for our elderly. We are there providing mental health services-services that are desperately needed at the community level. We are the public health infrastructure. Our mission is focused on improving the health status of the people in our communities…providing free clinics, promoting health, implementing disease management protocols to improve the health of people suffering from diabetes, heart disease, asthma. Every day we are on the front lines with a mission to fulfill: To improve the health and welfare of the people in our communities. A mission that governs our every decision.

With more than 25,000 full and part-time employees, hospitals are vital to Maine's economy. Hospitals are most often the largest employer in their communities. We are one of the largest employment sectors in the state. An estimated 13,000 new jobs will be created in health care in Maine from 1998 - 2008. According to a recent Maine Center for Economic Policy report, health care accounted for more than half the growth in employment and wages in Maine, and "represents one of the few relatively bright spots in the rural economy…"

On behalf of the Maine Hospital Association, I am here to today to present our testimony in opposition to LD 1792. We have serious concerns about the impact this bill would have on the ability of hospitals and other nonprofit organizations to effectively recruit individuals for officer-level positions within their organizations. It is quite clear that Maine hospitals must compete nationally in the recruitment of candidates for chief executive positions and other
management positions. Maine's hospitals are ranked 3rd best in the country in the quality of care provided to our patients. We should be very proud of the work being done by our hospitals and it is vitally important that our community hospitals are able to continue to recruit and hire the very best to run these highly complex and dynamic organizations.

Hospital leaders must posses a diverse set of talents that allow them to advance the ambitious charitable missions of their organizations, ensure efficient management of their complex entities, respond to the demands of the public/private financing that dominates healthcare, comply with the myriad of state and federal regulations, oversee fundraising/grant management among so many other complex demands affecting non-profit healthcare organizations. The complexity is confounded by the myriad of state and federal regulations applicable to hospitals and their affiliated entities. In addition to managing this highly regulated environment, hospitals are expected to be efficiently run businesses, providing the highest quality of care and giving it away at no cost to the neediest among us. Hospitals also provide critically necessary services to their communities that are not reimbursed by any public or private payer, from smoking cessation programs to diabetes management classes. We must satisfy the banks and bond companies that we are financially stable, while we simultaneously assure that our nonprofit mission is fulfilled. Proper management of this unique business requires the most skilled and experienced leadership we can find, which means we must compete for the absolute best administrators nationwide among non-profit and for-profit organizations alike.

Moreover, we do not believe that this legislation is necessary given existing state and federal laws that already govern this issue. It is imperative that the Committee understand current efforts by the Internal Revenue Service to scrutinize nonprofits - specifically with regard to executive compensation. Over the last couple of years there has been increasing activity at the federal level d by both the Internal Revenue Service and the Congress. Let me start first with the IRS. In the late 1990's the Congress enacted a new law regarding intermediate sanctions on excess benefit transactions. An excess benefit transaction occurs when a person, which pertains to anyone who "is in a position to exercise substantial influence of the affairs of the tax exempt organization", receives payment above fair market value from the exempt organization.

In 2004 an Executive Compensation Compliance Initiative was implemented by the IRS designed to review compensation practices of exempt organizations to identify tax administration concerns and potential areas of abuse in the tax exempt sector. The initiative included an examination program focused on executive compensation paid by a broad range of public charities. The project objectives included:

Use the Exempt Organization Compliance Unit and Data Analysis Unit to impact a broader cross-section of the Exempt Organization community through correspondence, and where appropriate traditional examination techniques.
Increase awareness of compensation as a compliance issues within the charitable sector and establish an IRS enforcement presence in this area
Observe the practices and procedures exempt organizations use to determine compensation of their officers, directors, trustees, key employees and related persons
Assess and enhance tax law reporting and compliance with respect to compensation practices of exempt organizations.

The IRS contacted 1,826 exempt organizations regarding their executives' compensation. Additionally, the IRS conducted examinations of 782 organizations to determine whether the compensation was reasonable in accordance with IRS regulations. Within this regulation it provides for a "presumption of reasonableness" so long as the exempt organization can prove the following:

The compensation committee must be comprised of independent board members (no representatives from management);
The committee must gather market data consisting of real salary survey data;
The data used for establishing executive compensation must be comparable for that respective organization;
o Like services
- Type of work
- Hands on or general involvement
- National or local in scope
- Number of employees managed
- Budget or assets managed
- Managing multiple functions, departments, facilities or entities
o By like enterprises (whether taxable or tax-exempt)
- Size - by budget, revenues, number of employees, persons served
- Entities must be competing for same pool of talent

o Under like circumstances

Compensation committee must have minutes citing data used

The examination phase of this IRS initiative focused on:

Organization's compensation policies and procedures
Duties and responsibilities of officers, trustees, and key employees
Compensation oversight by Board/Trustees

As a result of this recent review conducted by the IRS, the federal agency plans to undertake additional initiatives including amending the 990 form to facilitate accurate and complete reporting and focus future initiatives on the correlation between satisfaction of the rebuttable presumption as to how the compensation was established and the reasonableness of compensation paid to its officers by the organization.

To bring this closer to home, here is the description undertaken by one hospital in Maine:

The Board of Trustees without the involvement of the CEO, retains the services of an independent compensation consultant - Towers Perrin is one of the firms used for this purpose. In many instances the Board also determines where within the comparable market survey data that they want the compensation set. For instance in this example, the board directed that the compensation be set at 70% of the comparable market salaries. Further, a portion of CEO salaries are typically contingent upon performance objectives that are established and reviewed by the Board.

I share all of this to underscore the significant efforts being undertaken by the IRS pertaining to executive compensation. Additionally, the Congress over the last couple of years has been conducting hearings focused on many of these same issues. The Congressional Committees have opted at this time to place more pressure on the IRS to maintain their vigilance in conducting compliance checks and to strengthen their existing regulations.

Finally, it should also be noted that Maine's Attorney General also was recently given broader authority to investigate non-profits to evaluate some of the very issues raised in this legislation. The following is an excerpt from Chapter 550 which was enacted in 2002:
Excerpts from CHAPTER 550 (Enacted in 2002)
H.P. 1307 - L.D. 1770
An Act Regarding Public Charities, Nonprofit Corporations and Conversions of Nonprofit Entities to For-profit Entities

Be it enacted by the People of the State of Maine as follows:
PART A
Sec. A-1. 5 MRSA §194 is repealed and the following enacted in its place:
§194. Public charities
1. Definition. As used in this section, "public charity" means an entity formed primarily for charitable purposes, including but not limited to:

A. A corporation formed under Title 13 or Title 13-B primarily for charitable purposes; and

B. A charitable trust.

2. Application; funds. The Attorney General shall enforce due application of funds given or appropriated to public charities within the State and prevent breaches of trust in the administration of public charities.

3. Gift. A gift to a public charity made for a public charitable purpose is deemed to have been made with a general intention to devote the property to public charitable purposes, unless otherwise provided in writing in the gift instrument.

4. Party to proceedings. The Attorney General must be made a party to all judicial proceedings in which the Attorney General is interested in the performance of the Attorney General's duties under subsection 2.

5. Investigation. The Attorney General may conduct an investigation using the methods set forth in subsections 6 and 7 if:

A. The Attorney General reasonably believes that a public charity has engaged or is about to engage in one of the following acts or practices:

(1) Consummation of a conversion transaction as defined in section 194-B without compliance with the applicable provisions of sections 194-C through 194-H; or

(2) The application of funds or assets of a public charity:

(i) In violation of statute;

(ii) For noncharitable purposes unrelated to the operations of the public charity; or

(iii) For private inurement or excess benefits provided to directors, officers, disqualified persons or others deemed insiders under applicable federal law for tax-exempt organizations; and

B. The Attorney General has applied to a Justice of the Superior Court for approval to conduct the investigation and the justice has granted that approval. The application for approval may be filed ex parte, and the justice shall approve the application if the justice finds that the conditions set forth in paragraph A have been met.

I have attached several documents pertaining to the current work of the IRS for your review and consideration. We appreciate your consideration of our concerns. We would urge the committee to vote Ought Not to Pass on this legislation. I would be pleased to respond to any questions you may have.

Advocacy