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Volume Eleven Number Three March 2009 Published Monthly Earn CEU Credit Meet Bill Parke www . hcca - info . org / quiz , see page 13 Vice President Unauthorized access Corporate Compliance to protected health Rutherford Hopsital information: Educating page 14 the workforce HCCA is going green page 10 HCCA conference attendees will NOT automatically Feature Focus: receive conference binders. If you would like to purchase conference binders, please choose that option on your Executive conference registration form. Attendees will receive electronic access to course materials prior to the conference compensation in as well as a CD onsite with all the conference materials. troubled times page 32

n Health Care Compliance Association • 888-580-8373 • www.hcca-info.org Editor’s note: Gerald Griffjth is a partner in the Chicago offjce of Jones Day where he practices as a member of the Health Care and Tax Practice Groups. He may be reached by telephone at 312/269-1507 or by email at ggriffjth@jonesday.com. – Part 1 Executive compensation in troubled times feature focus This article, published in the March 2009 issue of Compliance Today, appears here with permission from the Health Care Compliance Association. Call 888/580-8373 with reprint requests. By Gerald M. Griffith, JD Effect of economic downturn on executive compensation It is unusual now to hear news stories about prospective bailout pack- ages that do not also include calls for limits on executive compensa- tion. Just as the Sarbanes Oxley Act arguably started a transparency trend that has permeated healthcare governance thinking, so too may rules on executive compensation in Corporate America from the bailouts fjlter through to healthcare organizations facing their own or many nonprofit healthcare organizations, front page stories F fjnancial challenges. on executive compensation have become an annual event due to the information publicly available on Form 990. Recently, Economic pressures the Internal Revenue Service (IRS) has increased the scrutiny of Many health care organizations are feeling the pressure of the strug- executive compensation among all nonprofits, including hospitals and gling economy, through reductions or delays in payment from govern- academic medical centers, with three separate, detailed compliance ment payment programs such as Medicaid, tougher negotiations with checks sent to several hundred organizations in the past five years. In private payers, increased numbers of uninsured patients, mounting addition to educating the nonprofit sector, those compliance checks property tax exemption challenges, tighter credit, and plummeting have sought to enforce the excess benefit sanctions that impose excise investment returns. In what is not likely to be an anomaly, one highly taxes of up to 225% on any insider compensation above reasonable regarded suburban hospital in a particularly hard-hit industrial state amounts. recently announced a voluntary turnaround plan to reduce a projected multi-million dollar loss in 2008, including a 10% pay cut for the With healthcare and other sectors facing a diffjcult economic situation, CEO and other top executives and employed doctors, and a 4% pay including the highest rate of mass layofgs rates in more than ten years, 1 cut for department managers as an alternative to lay ofgs. Sources esti- compensation for health care executives is coming under increasing mated the pay cuts would save 225 jobs at the hospital. 2 With rising scrutiny. Executive compensation packages that may be viewed as rich unemployment rates, other health care organizations may feel the need in cash compensation by “Joe the Plumber” standards, or include hot to make similar reductions as part of an overall cost-cutting strategy. button perquisites (e.g., fjrst class travel), are drawing more intense media and government scrutiny. Tiis article will explore how that With various sectors (e.g., fjnancial, automotive) seeking federal added scrutiny has manifested itself, and what steps can be taken to bailouts, Congress has turned its attention once again to potential minimize the negative publicity associated with executive compensa- abuses in executive compensation. In a recent press release regarding tion, protect it against IRS sanctions, and demonstrate to policy the federal fjnancial rescue program, the Senate Finance Committee makers, regulators, and charitable donors that nonprofjt healthcare strongly urged the Secretary of the Treasury to implement proposed organizations can control executive compensation without additional limits on executive compensation for senior executives of institutions regulation or investigations. Tiose proactive steps can be described as that receive federal bailout funds and ensure transparency in the following best practices in the compensation approval process, obtain- bailout process. 3 Tiose limits in Sections 162(m)(5) and 280G(e) ing appropriate comparability data, and adopting a compensation of the Internal Revenue Code would limit deductibility to the fjrst plan design that ties compensation to both fjnancial and non-fjnancial $500,000 of compensation and eliminate the exception allowing goals. higher deductibility for performance-based compensation. 4 In response March 2009 32