Nonprofit Hospital Systems: Survey on Executive Compensation	 
Policies and Practices (30-JUN-06, GAO-06-907R).		 
                                                                 
As a part of Congress's continuing efforts to oversee the	 
activities of the nonprofit sector, it asked us to review	 
executive compensation issues at selected private, nonprofit	 
hospital systems to gain an understanding of the policies and	 
practices related to the salaries, benefits, travel, gifts, and  
entertainment expenses paid by these hospital systems. Our	 
study's key questions were as follows: (1) What corporate	 
governance structure do selected hospital systems report as	 
having in place over executive compensation? (2) What is the	 
basis for the compensation and benefits earned by, awarded to, or
paid to the executives as reported by selected hospital systems? 
(3) What internal controls do selected hospital systems report as
having in place over the approval, payment, and monitoring of	 
executive travel and entertainment expenses, gifts, and other	 
perquisites? On June 5, 2006, we briefed Congressional staff on  
the results of our work. This report transmits the briefing	 
provided to Congressional staff, as amended to reflect some	 
additional observations.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-907R					        
    ACCNO:   A56238						        
  TITLE:     Nonprofit Hospital Systems: Survey on Executive	      
Compensation Policies and Practices				 
     DATE:   06/30/2006 
  SUBJECT:   Executive compensation				 
	     Fringe benefits					 
	     Hospitals						 
	     Internal controls					 
	     Nonprofit organizations				 
	     Pay						 
	     Payroll systems					 
	     Private sector					 
	     Private sector practices				 
	     Surveys						 

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GAO-06-907R

     

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United States Government Accountability Office Washington, DC 20548

June 30, 2006

The Honorable William M. Thomas Chairman Committee on Ways and Means House
of Representatives

Subject: Nonprofit Hospital Systems: Survey on Executive Compensation
Policies and Practices

Dear Mr. Chairman:

As a part of Congress's continuing efforts to oversee the activities of
the nonprofit sector, you asked us to review executive compensation issues
at selected private, nonprofit hospital systems to gain an understanding
of the policies and practices related to the salaries, benefits, travel,
gifts, and entertainment expenses paid by these hospital systems. Our
study's key questions were as follows:

     o What corporate governance structure do selected hospital systems
       report as having in place over executive compensation?
     o What is the basis for the compensation and benefits earned by, awarded
       to, or paid to the executives as reported by selected hospital
       systems?
     o What internal controls do selected hospital systems report as having
       in place over the approval, payment, and monitoring of executive
       travel and entertainment expenses, gifts, and other perquisites?

In answering our study's key questions, we used the American Hospital
Association's AHA Guide (2005) to identify private, nonprofit hospital
systems according to the number of staffed beds reported. We developed an
electronic survey to gather information from selected hospital systems and
administered the survey in two phases. In the first phase, we judgmentally
selected 15 hospital systems considering geographic diversity. At least 1
hospital system was selected from each of the nine geographic regions, as
defined by the Census Bureau. We briefed your staff on the results of our
initial survey and, at your request, selected an additional 85 hospital
systems to survey. The 15 and 85 hospital systems combined were the top
100 that we identified from the AHA Guide (2005). We revised our initial
survey instrument based on responses received. We analyzed the survey
responses to identify unusual, incomplete, or inconsistent responses and
followed up with the hospital systems to the extent possible after
considering any survey comments provided. We did not seek to validate the
responses provided.

Our survey was not designed to draw any conclusions with respect to the
adequacy or sufficiency of the policies, practices, or procedures of any
individual hospital system or whether hospital systems are complying with
applicable laws and regulations. Since we did not randomly sample from the
entire population of private, nonprofit hospital systems, we could not
generalize the results of our work to this population. We conducted our
work from June 2005 through June 2006 in accordance with generally
accepted government auditing standards.

On June 5, 2006, we briefed your staff on the results of our work. This
report transmits the briefing provided to your staff, as amended to
reflect some additional observations (see Enclosure I). This report also
includes a copy of the survey instrument with the number of responses to
each question (see Enclosure II).

                                    Summary

We received responses from 65 of the 100 hospital systems. The hospital
systems reported similarities in certain governance and compensation
policies and practices. For example, hospital systems commonly reported
policies and practices such as

     o having an executive compensation committee or entire board with
       primary responsibility for approving executives' base salary, bonuses,
       and perquisites;
     o having a conflict of interest policy that covers members of the
       executive compensation committee and compensation consultants; and
     o relying upon comparable market data of total compensation and benefits
       prior to making compensation determinations.

With respect to perquisites and entertainment and travel expenses for
their executives and the related internal control for these payments, the
65 hospital systems reported a range of practices. For example, hospital
systems commonly reported that they provide for payment of
automobile-related expenses as a perquisite to executives. They also
commonly reported having written policies that cover business travel and
entertainment expenses. However, hospital systems reported a mix of
practices related to payment for other perquisites such as memberships in
recreational and social clubs and audits of perquisites and entertainment
expenses.

As we agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution of it until 30
days from the date of this letter. At that time, we will send copies to
the Ranking Minority Member of your Committee and other interested
congressional committees. We will also make copies available to others
upon request. In addition, the report will be available at no charge on
GAO's Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at (206)
287-4809 or by e-mail at [email protected]. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. Key contributors to this assignment include Kimberly
Brooks (Assistant Director), Cindy Gilbert, Curtis Groves, Bret Kressin,
Matt Michaels, Scott McNulty, and Terry Richardson.

Director Financial Management and Assurance

Enclosures - 2 

Enclosure I - Briefing on Survey Results

Nonprofit Hospital Systems: Survey on Executive Compensation Policies and
                                   Practices

    Briefing Chairman, Committee on Ways and Means House of Representatives

                                    Contents

     o Objectives, Scope, and Methodology
     o Results in Brief
     o Background
     o Survey Results

                       Objectives, Scope, and Methodology

The Chairman of the House Ways and Means Committee asked GAO to review
executive compensation issues at selected private, nonprofit hospital
systems, including the policies and practices related to the salaries,
benefits, travel, gifts, and entertainment expenses paid by the hospital
systems. The study's key questions were as follows:

     o What corporate governance structure do selected hospital systems
       report as having in place over executive compensation?
     o What is the basis for the compensation and benefits earned by, awarded
       to, or paid to executives as reported by selected hospital systems?
     o What internal controls do selected hospital systems report as having
       in place over the approval, payment, and monitoring of executive
       travel and entertainment expenses, gifts, and other perquisites?

                       Objectives, Scope, and Methodology

     o We used the American Hospital Association's AHA Guide (2005) to
       identify private, nonprofit hospital systems according to the number
       of staffed beds reported. We identified 172 systems as private,
       nonprofit systems within the top 200 private or nonfederal
       governmental hospital systems (state or local) that we identified from
       the guide.
     o We developed an electronic survey to gather information from selected
       hospital systems and administered the survey in two phases. Although
       the majority of survey questions were closed-ended, hospital systems
       were given the opportunity at the end of the survey to provide
       comments about any of the questions.

                       Objectives, Scope, and Methodology

     o In the first phase, we judgmentally selected 15 hospital systems from
       the list of 172 considering geographic diversity. At least 1 hospital
       system was selected from each of the nine geographic regions as
       defined by the Census Bureau.
     o We briefed your staff on the results of our initial survey and, at
       your request, selected an additional 85 hospital systems to survey.
       The 15 and 85 hospital systems combined were the top 100 from our list
       of 172 systems. We revised our initial survey instrument based on
       responses received.

                       Objectives, Scope, and Methodology

     o We also followed up with the 13 hospital systems that responded during
       the first phase to obtain their responses to questions that were
       either added or modified from the initial survey. We provided an
       opportunity for the two hospital systems that did not respond during
       the first phase to respond during the second phase; one of these two
       ultimately did respond.
     o We analyzed the survey responses to identify unusual, incomplete, or
       inconsistent responses and followed up with the hospital systems to
       the extent possible after considering any survey comments provided. We
       did not seek to validate the responses provided.

                       Objectives, Scope, and Methodology

     o Our survey was not designed to draw any conclusions with respect to
       the adequacy or sufficiency of the policies, practices, or procedures
       of any individual hospital system or whether hospital systems are
       complying with applicable laws and regulations.
     o Since we did not randomly sample from the entire population of
       private, nonprofit hospital systems, we could not generalize the
       results of our work to this population.
     o We conducted our work between June 2005 and June 2006 in accordance
       with generally accepted government auditing standards.

Results in Brief

We received responses from 65 of the 100 hospital systems. The hospital
systems reported similarities in certain governance and compensation
policies and practices. For example, hospital systems commonly reported
policies and practices such as

     o having an executive compensation committee or entire board with
       primary responsibility for approving executives' base salary, bonuses,
       and perquisites;
     o having a conflict of interest policy that covers members of the
       executive compensation committee and compensation consultants; and

Results in Brief

o  relying upon comparable market data of total compensation and benefits
prior to making compensation determinations.

With respect to perquisites, entertainment and travel expenses and related
internal control for their executives, the 65 hospital systems reported a
range of practices. For example, hospital systems commonly reported that
they provide for payment of automobile-related expenses as a perquisite to
executives. They also commonly reported having written policies that cover
business travel and entertainment expenses. However, hospital systems
reported a mix of practices related to payment for other perquisites, such
as memberships in recreational and social clubs and audits of perquisites
and entertainment expenses.

                                   Background

     o The AHA Guide (2005) defines hospital systems as consisting of two or
       more hospitals owned, leased, sponsored, or contract-managed by a
       central organization, or consisting of a single, freestanding hospital
       that includes as members three or more owned or leased nonhospital
       health care organizations.
     o Hospital systems are classified as "501(c)(3)" organizations exempt
       from taxation under 26 U.S.C. S: 501(a) if (1) they serve a charitable
       purpose, (2) no part of their net earnings goes to the benefit of any
       private shareholder or individual, and (3) they do not participate in
       political campaigns for or against candidates or carry on propaganda
       or lobbying as a substantial part of their activities.

                                       10

                                   Background

     o The Internal Revenue Code (I.R.C.) and regulations provide a framework
       for nonprofit organizations regarding executive compensation and the
       travel and entertainment expenses paid for executives.
          * I.R.C. prohibits the payment of excessive compensation and other
            transactions that provide excessive economic benefit to
            executives
          * (I.R.C. S: 4958).
     o Regulations encourage organizations to have executive compensation
       arrangements approved in advance by members of an "authorized body" of
       the organization (such as the board), none of whom have a conflict of
       interest with respect to the transaction (Treas. Reg. S:
       53.4958-6(a)).

                                   Background

o  Regulations also encourage but do not require organizations to take
certain actions when determining compensation. Regulations provide that an
organization has a "rebuttable presumption" that compensation is not an
excess benefit transaction if an authorized body (1) approved the
compensation arrangement in advance, (2) obtained and relied on
appropriate data as to the comparability and reasonableness of the total
compensation, and (3) documented the basis for its determination at the
time it made its decisions (Treas. Reg. S: 53.4958-6(a)).

                                       12

                                   Background

     o Recently, Congress has raised questions about the adequacy of
       oversight, reporting requirements, and overall governance of nonprofit
       and tax-exempt organizations.
     o The Independent Sector, a group that represents nonprofit
       organizations, convened a Panel on the Nonprofit Sector and in 2005
       proposed actions to strengthen governance and accountability of
       nonprofit organizations. The panel made specific recommendations to
       promote better governance over executive compensation, including
       proposals that encourage compliance with the "rebuttable presumption"
       regulations and better reporting on travel expenses.

Survey Results

The following pages summarize responses provided by the 65 hospital
systems to selected survey questions.

o  We did not obtain responses to every survey question from all 65
hospital systems either because the hospital systems did not provide a
response and should have, or because the question did not apply to their
circumstances. As a result, the response frequencies will not always total
65.

                                       14

Governance and Compensation Policies and Practices

Written Policies for the Executive Compensation Body

     o 40 of the 65 hospital systems reported having written criteria for
       selecting members of the body that governs executive compensation; 20
       of the 40 reported that the criteria address the knowledge for
       members, 19 of the 40 reported that the criteria address the skills
       for members, and 21 of the 40 reported that the criteria address the
       experience for members.
     o All 65 of the hospital systems reported having a conflict of interest
       policy that covers members of the Executive Compensation Body, and
       they all reported that the policies require disclosure of potential
       conflicts.

Governance and Compensation Policies and Practices

Use of Outside Consultants to Advise on Compensation Matters

     o All of the 65 hospital systems reported that the Executive
       Compensation Body can hire outside consultants to advise on
       compensation and benefit issues.
     o 63 of the 65 hospital systems reported that the Executive Compensation
       Body has hired outside compensation and benefits consultants since
       January 1, 2004.
     o 40 of the 65 hospital systems reported having a policy that requires
       compensation consultants to be free of any conflicts of interest.

                                       16

Governance and Compensation Policies and Practices

Practices Related to Compensation Determinations

     o All of the 65 hospital systems reported that they rely upon comparable
       market data of total compensation and benefits prior to making
       compensation determinations for the CEO and 63 of the 65 hospital
       systems reported doing this for the other top four executives.1
     o 64 of the 65 hospital systems reported that for the CEO, they
       documented the basis for compensation determinations at the same time
       the determination was made, and 58 of the 64 responding hospital
       systems reported doing this for the other top four executives.

1The other top four executives are the four highest compensated executives
other than the CEO.

Governance and Compensation Policies and Practices

Responsibility for Approving Top Executives' Compensation

     o Hospital systems reported that an Executive Compensation Committee or
       Entire Board is primarily responsible for:
     o approving the CEO's base salary-58 of the 65 hospital systems
     o approving the CEO's bonuses-55 of the 65 hospital systems
     o approving the CEO's perquisites-59 of the 65 hospital systems

                                       18

Governance and Compensation Policies and Practices

Responsibility for Approving Top Executives' Compensation

     o Hospital systems reported that an Executive Compensation Committee or
       Entire Board is primarily responsible for:
     o approving the other top four executives' base salary-50 of the 65
       hospital systems
     o approving the other top four executives' bonuses-50 of the 65 hospital
       systems
     o approving the other top four executives' perquisites-51 of the 65
       hospital systems

Governance and Compensation Policies and Practices

Deferred Compensation Provided to Top Executives

o  51 of the 65 hospital systems reported providing supplemental executive
retirement plans (SERPs)^2 to the CEO, and 50 of the 65 hospital systems
reported providing SERPs to the other top four executives.

^2SERPs are maintained by an employer primarily for the purpose of
providing deferred compensation to a select group of management or highly
compensated employees. For example, when an executive is limited to the
amount that can be contributed to a 401(k) or similar plan because his or
her salary exceeds the statutory limit for contributions, employers can
add to SERPs, an amount equal to that which an executive would have
contributed under the company's 401(k) if not for the limits. SERP
"accounts" are not funded in advance. When benefits are paid to an
executive in the future, they are paid from the general assets of the
employer.

                                       20

Governance and Compensation Policies and Practices

Deferred Compensation Provided to Top Executives

o  18 of the 65 hospital systems reported providing split-dollar life
insurance^3 plans to the CEO and to the other top four executives.

^3In split-dollar life insurance policies, the employer and the covered
executive ordinarily split the costs and benefits, sometimes unequally. In
some cases, these policies can provide for death benefits up to four times
base salary for survivor life insurance. Also, with split-dollar policies,
the employer can pay close to 100 percent of the premiums, that earn
interest and are not subject to tax. When an executive retires, the
employer is repaid--without interest--for the amount it contributed in
premiums. Treasury regulations provide guidance on, among other things,
the taxation of these benefits.

Governance and Compensation Policies and Practices

Deferred Compensation Provided to Top Executives

     o 55 and 54 of the 64 responding hospital systems reported providing
       457(b) plans for the CEO and the other top four executives,
       respectively.
     o Hospital systems also reported providing 457(f) and 403(b) plans4:
     o 33 of the 64 responding hospital systems reported 457(f) plans for the
       CEO, and 34 of the 65 for the other top four executives; and
     o 45 of the 65 hospital systems reported 403(b) plans for the CEO, and
       46 of the 65 for the other top four executives.

4These plans are so named by the specific section of the Internal Revenue
Code that provides guidance for the plans. These plans generally allow
employees to defer wages for tax purposes. Each plan has its own features,
including those related to contributions, distributions, loans, and
rollovers.

                                       22

Governance and Compensation Policies and Practices

Severance Packages Provided to Top Executives

     o 41 of the 65 hospital systems reported that since January 1, 2004, a
       person serving as CEO or in one of the top four executive positions
       has left the system.
     o 2 of the 41 hospital systems reported that since January 1, 2004, they
       made a severance payment to a departing CEO who resigned, and 5 of the
       41 hospital systems reported that they made a severance payment to one
       of the top four executives who resigned.
     o 3 of the 41 hospital systems reported that since January 1, 2004, they
       made a severance payment to a departing CEO who was involuntarily
       terminated, and 20 of the 41 hospital systems reported that they made
       a severance payment to one of the top four executives who was
       involuntarily terminated.

Governance and Compensation Policies and Practices

Perquisites Provided to Top Executives and Related Internal Control

     o 55 of the 65 hospital systems reported that they provide for
       automobile-related expenses as a perquisite to the CEO.
     o 21 of the 55 hospital systems reported having an internal audit since
       January 1, 2004 of automobile-related expenses for the CEO. Two other
       systems reported having an internal audit of automobilerelated
       expenses, but reported that they did not provide this perquisite to
       the CEO. These two systems provided an explanation for this. See
       footnote "M" in the survey instrument (Enclosure II).

                                       24

Governance and Compensation Policies and Practices

Perquisites Provided to Top Executives and Related Internal Control

     o 52 of the 65 hospital systems reported that they provide for
       automobile-related expenses as a perquisite to the other top four
       executives.
     o 21 of the 52 hospital systems reported having an internal audit since
       January 1, 2004 of automobile-related expenses for the other top four
       executives. Three other systems reported having an internal audit of
       automobile-related expenses, but reported that they did not provide
       this as a perquisite to the other top four executives. Two of these
       systems provided an explanation for this; an explanation from the
       other system was not available. See footnote "M" in the survey
       instrument (Enclosure II).

Governance and Compensation Policies and Practices

Perquisites Provided to Top Executives and Related Internal Control

     o 45 of the 65 hospital systems reported that they provide for
       memberships in recreational or social clubs as a perquisite to the
       CEO.
     o 19 of the 45 hospital systems reported having an internal audit since
       January 1, 2004 of memberships in recreational or social clubs for the
       CEO. Two other systems reported having an internal audit of these
       expenses for the CEO, but reported that they did not provide this as a
       perquisite to the CEO. One system provided an explanation for this; an
       explanation from the other system was not available. See footnote "N"
       in the survey instrument (Enclosure II).

                                       26

Governance and Compensation Policies and Practices

Perquisites Provided to Top Executives and Related Internal Control

     o 35 of the 65 hospital systems reported that they provide for
       memberships in recreational or social clubs as a perquisite to the
       other top four executives.
     o 14 of the 35 hospital systems reported having an internal audit since
       January 1, 2004 of memberships in recreational or social clubs for the
       other top four executives. Three other systems reported having an
       internal audit of these expenses, but these three systems reported
       that they did not provide this as a perquisite to the other top four
       executives. One system provided an explanation for this; an
       explanation from the other two systems was not available. See footnote
       "N" in the survey instrument (Enclosure II).

Governance and Compensation Policies and Practices

Other Perquisites Provided to Top Executives

     o 25 and 23 of the 65 hospital systems reported that they provide for
       financial or tax planning as a perquisite to the CEO and the other top
       four executives, respectively.
     o 17 and 13 of the 65 hospital systems reported that they provide tax
       preparation as a perquisite to the CEO and the other top four
       executives, respectively.
     o 7 of the 65 hospital systems reported that they provide for attorney
       fees as a perquisite to the CEO and the other top four executives.
     o 13 and 8 of the 64 responding hospital systems reported that they
       provide for personal travel expenses for the spouse of the CEO and the
       other top four executives as a perquisite, respectively.

                                       28

Governance and Compensation Policies and Practices

Certain Perquisites Generally Not Provided to Top Executives

     o 63 of the 65 hospital systems reported that they do not make loans or
       state law prohibits them from making loans to the CEO and the other
       top four executives; 2 systems reported that they make loans.
     o 64 of the 65 hospital systems reported that they do not pay for
       automobile related expenses for spouses and family members of the CEO
       and the other top four executives; 1 system did not respond to the
       specific questions about paying for these expenses for spouses and
       family members.

Governance and Compensation Policies and Practices

Certain Perquisites Generally Not Provided to Top Executives

     o 63 and 64 of 65 hospital systems reported that they do not pay for
       memberships in recreational or social clubs for spouses of the CEO and
       the other top four executives, respectively. Two systems did not
       respond to this question for the CEO, and 1 did not respond for the
       other top four executives.
     o 64 of the 65 hospital systems reported that they do not pay for
       memberships in recreational or social clubs for family members of the
       CEO and other top four executives. One system did not respond to this
       question for the CEO, and 1 did not respond for the other top four
       executives.

                                       30

Governance and Compensation Policies and Practices

Entertainment Expenses for Top Executives

     o 63 of the 65 hospital systems reported providing payment for
       entertainment expenses. Regarding sports events,
     o 28 systems reported that they pay for the CEO to attend sports events,
       34 reported that they do not pay, and 1 did not respond to the
       specific question about paying for sports events.
     o 29 systems reported that they pay for the other top four executives to
       attend sports events, 33 reported that they do not pay, and 1 did not
       respond to the specific question about paying for sports events.

Governance and Compensation Policies and Practices

Entertainment Expenses for Top Executives

     o 63 of the 65 hospital systems reported providing payment for
       entertainment expenses. Regarding holiday or other company parties,
     o 49 systems reported that they pay for the CEO and the other top four
       executives to attend holiday or other company parties, 13 reported
       that they do not pay, and 1 did not respond to the specific question
       about paying for these expenses.

                                       32

Governance and Compensation Policies and Practices

Entertainment Expenses for Top Executives

     o 63 of the 65 hospital systems reported providing payment for
       entertainment expenses. Regarding various off-site activities,
     o 48 systems reported that they pay for the CEO to attend meetings,
       retreats, or other off-site activities involving trips to resort
       locations or private, exclusive clubs. Fourteen systems reported that
       they do not pay and 1 did not respond to the specific question about
       paying for these types of expenses. For the other top four executives,
       46 systems reported that they pay for these expenses, 16 reported they
       do not, and 1 did not respond to the specific questions about paying
       for these types of expenses.

Governance and Compensation Policies and Practices

Entertainment Expenses for Top Executives

     o 63 of the 65 hospital systems reported providing payment for
       entertainment expenses. Regarding theatre performances,
     o 17 systems reported that they pay for the CEO to attend theatre
       performances, 45 reported that they do not pay, and 1 did not respond
       to the specific question about paying for these types of expenses.
     o 16 systems reported that they pay for the other top four executives to
       attend theatre performances, 46 reported that they do not pay, and 1
       did not respond to the specific question about paying for these types
       of expenses.

                                       34

Governance and Compensation Policies and Practices

Entertainment Expenses and Related Internal Control

     o 63 of the 65 hospital systems reported providing payment for
       entertainment expenses. Of those 63 systems:
     o 56 systems reported having a written policy covering entertainment
       expenses. 55 and 53 of the 56 reported that the policy describes the
       documentation necessary to support business entertainment expenses for
       the CEO and the other top four executives, respectively.

Governance and Compensation Policies and Practices

Entertainment Expenses and Related Internal Control

     o 63 of the 65 hospital systems reported providing payment for
       entertainment expenses. Of those 63 systems:
     o 60 systems reported that the CEO's entertainment expenses are reviewed
       after being incurred, 1 reported that they are not reviewed, and 2 did
       not respond to the specific question about reviews of these expenses
       for the CEO.
     o 59 systems reported that the other top four executives' entertainment
       expenses are reviewed after being incurred, 2 reported that they are
       not reviewed, and 2 did not respond to the specific question about
       reviews of these expenses for the other top four executives.

                                       36

Governance and Compensation Policies and Practices

Entertainment Expenses and Related Internal Control

     o 63 of the 65 hospital systems reported providing payment for
       entertainment expenses. Of those 63 systems:
     o 39 and 40 systems reported having an internal audit since January 1,
       2004, of entertainment expenses for the CEO and one or more of the
       other top four executives, respectively.
     o 9 and 7 systems reported having an external audit (separate from the
       annual financial statement audit) since January 1, 2004, of
       entertainment expenses for the CEO and one or more of the other top
       four executives, respectively.

Governance and Compensation Policies and Practices

Travel Expenses and Related Internal Control

     o 62 of the 65 hospital systems reported having a written policy
       covering travel expenses for the CEO and other top four executives. Of
       those 62 systems:
     o 59 systems reported that their policy describes what are legitimate
       domestic business travel expenses for the CEO and the other top four
       executives, and 3 systems reported that their policy does not.
     o 61 and 62 systems reported that their policy describes the
       documentation necessary to support domestic business travel expenses
       for the CEO and the other top four executives, respectively. One
       system did not respond to the question for the CEO.

                                       38

Governance and Compensation Policies and Practices

Travel Expenses and Related Internal Control

     o 64 of the 65 hospital systems reported that the CEO's and other top
       four executives' travel expenses are reviewed after being incurred.
       One system did not respond to the specific questions about reviews of
       these expenses.
     o 40 and 41 of the 65 hospital systems reported having an internal audit
       since January 1, 2004, of travel expenses for the CEO and one or more
       of the other top four executives, respectively.
     o 10 and 9 of the 65 hospital systems reported having an external audit
       (separate from the annual financial statement audit) since January 1,
       2004, of travel expenses for the CEO and one or more of the other top
       four executives, respectively.

Enclosure II - Copy of Survey Instrument with Number of Responses for Each
                                    Question

2. Do the written criteria for selecting members of the Executive
Compensation Body address the following factors?

Yes No

TT

a) Knowledge? 20 20

b) Skills? 19 21

c) Experience? 21 19

3. Is either the CEO or one of the Other Top Four Executives a voting
member of the Executive Compensation Body?

11 Yes AE Please list each person by name and title:

54 No

4. Since January 1, 2004, has the CEO attended Executive Compensation Body
meetings when his or her own compensation was being discussed? B

0 Yes 65 No

5. Since January 1, 2004, have any of the Other Top Four Executives
attended Executive Compensation Body meetings when their own compensation
was being discussed?

1 Yes 64 No

6. Does your hospital system have a conflict of interest policy that
covers members of the Executive Compensation Body? Note: Such a policy
could include one that exists specifically for the members or one that
exists for all Board Members who may serve on the Executive Compensation
Body.

65 Yes

0 No AE SKIP TO QUESTION #8

B Hospital systemsprovided comments that the CEO maybe present during
Executive CompensationBody meetings to provide input onsuch thingsas the
performance of other executives, but theCEO is excused froma meeting when
the CEO's compensation is to be discussed.

                                       3

 7. Does your hospital system's conflict of interest policy that covers members
                         of the Executive Compensation

Body ...                                                             
                                                                       Yes No 
                                                                         T T  
a) require disclosures of potential conflicts of interest?           65 0  
         b) outline conditions when members must recuse themselves from 59 6  
                                                particular discussions?    
c) provide guidance on what may constitute a conflicting situation?  62 3  

8. Within your hospital system, which entity or person has primary
responsibility for reviewing and approving all transactions between the
hospital system and disqualified persons as defined by 26 USC S: 4958(f)
and related regulations? Note: If multiple entities or persons have
primary responsibility, please check the last item, list or describe. Mark
one response _ for each subquestion.

12 Entire Board

18 Executive Compensation Committee

1 Chairperson of the Board

1 Chief Executive Officer

C

33 Other entities or persons AE please list or describe:

9. Can the Executive Compensation Body hire outside consultants to advise
on compensation and benefit issues?

65 Yes

0 No

10. Since January 1, 2004, has the Executive Compensation Body hired
outside compensation and benefits consultants?

63 Yes

2 No

C Hospital systems cited various individual or multiple committees. These
committees included Executive, Finance, Audit, Ethics, Conflict of
Interest,and Contract Approval. Hospital systemsalso cited
individualssuchas the ChiefCompliance Officer, Business PracticesOfficer,
and executives in charge of various departments or functions.

                                       4

11. To whom do the following entities report? Note: If multiple entities
or persons have primary responsibility, please check the box in the last
column, list or describe. Mark one response _ for each subquestion.

Chief

Executive

Executive Other Entities or Persons (list or

Compensation Chairperson Entire Board Committee of the Board Officer
describe)

TT TTT

a) Outside

compensation and 2 490 1 13AE ( )

benefits consultants?

b) Outside legal 4 240 5 32AE ( )D

advisors?

c) Other outside 5 220 4 27AE ( )E

advisors?

12. Does your hospital system have a policy that requires compensation
consultants to be free of any conflicts of interest?

40 Yes 25 No

D Hospital systems cited thegeneral counsel. E Hospital systems reported
that it varied depending on the situation in which the advisor was
engaged. 5

1. Within your hospital system, which entity or person has primary
       responsibility for the following roles regarding the goals and
       objectives on which incentive bonuses are based? Note: If multiple
       entities or persons have primary responsibility, please check the box
       in the last column, list or describe. Mark one response _ for each
2. Which entity or person within your hospital system has primary
       responsibility for each of the following with respect to the CEO?
       Note: If multiple entities or persons have primary responsibility,
       please check the box in the last column, list or describe. Mark one
       response _ for each subquestion.

subquestion.             
                               Executive          Chief                
                               Compensation       Executive            
                               Committee          Officer   Other Entities or
                               Chairperson of the           Persons (list or
                  Entire Board Board                        describe)
                             T T            T     T         T          
a) Developing goals and  0  16           0     20          26AE (   )G     
objectives?                                                         
b) Approving goals and   12 37           1     3           10AE (   )      
objectives?                                                         
c) Evaluating goals and  2  41           0     4           15AE (   )      
objectives?                                                         
d) Overseeing the                                                          
application of goals and 4  29           0     9           21AE (   )H
objectives?                                                         

                                   Executive

Compensation Chairperson Other Entities or Persons (list or Entire Board
Committee of the Board describe)

T TTT

a) Approving the CEO's salary 20381 6AE ( )

b) Approving the CEO's bonuses 17380 8AE( )

c) Approving the CEO's perquisites 19400 5AE( )

d) Approving the CEO's severance 21350 7AE( ) package

e) Approving the CEO's other 19400 5AE( ) compensation

G Hospital systems commonly cited multiple members of the executive
managementteam, such as theCEO, Executive Vice President, Chief Operating
Officer, and the executive in charge of human resources. One hospital
system reported that their Strategic PlanningCommittee had this
responsibility; another system reported that goalsand objectivesare
developedbythe entire Board, the Executive Compensation Bodyand the senior
executive team.

H Hospital systems reported that numerous committeesand management share
this responsibility. 7

18. Which entity or person within your hospital system has primary
responsibility for each of the following tasks with respect to the CEO?
Note: If multiple entities or persons have primary responsibility, please
check the box in the last column, list or describe. Mark one response _
for each subquestion.

                                   Executive

Other Entities or Persons (list or

Compensation Chairperson Entire Board Committee of the Board describe)

TT TT

a) Evaluating the CEO's 1728 7 13AE ( ) performance

b) Recommending adjustments to CEO's salary based on their 4465 10AE ( )
evaluations

c) Recommending adjustments to CEO's incentive bonus based on 3473 10AE (
) their evaluations

d) Approving adjustments to CEO's 21372 5AE ( ) salary based on
evaluations

e) Approving adjustments to the CEO's incentive bonus based on 19371 6AE (
) evaluations

                                       9

19. Which entity or person within your hospital system has primary
responsibility for each of the following tasks with respect to the Other
Top Four Executives? Note: If multiple entities or persons have primary
responsibility, please check the box in the last column, list or describe.
Mark one response _ for each subquestion.

T

No T

Chief Other Entities or

                                   Executive

Executive Persons (list or

Compensation Chairperson Entire Board Committee of the Board Officer
describe)

T

T

a) Evaluating the Other Top Four Yes T

                     Executives' performance 060 581AE ( )

T

b) Recommending adjustments to Other Top Four Executives' 060 553AE ( )

salary based on their evaluations No TT

c) Recommending adjustments to Other Top Four Executives' 0

T

incentive bonus based on their 5 0 526AE ( ) evaluations

                                     Yes TT

d) Approving adjustments to Other Top Four Executives' salary 5 40 1 163AE
( ) based on evaluations

                                       T

e) Approving adjustments to the Other Top Four Executives' 6 40 0 116AE (
) incentive bonus based on evaluations

T

Any of the Other Top CEO Four Executives

20. Since January 1, 2004, has the CEO or any of the Other Top Four
Executives received compensation from any party related to either the
hospital system or its 4 61

5 60 affiliates?

Incentive and Bonus Programs

Any of the Other Top CEO Four Executives

Yes No

Yes No

21. Does your hosptial system provide guaranteed bonuses to the CEO or any
of the Other Top Four Executives

0 64

regardless of their performance? 3 61

                                       10

Any of the Other Top Four Executives

CEO No T

T

N/A T

N/A T

22. Does your hospital system provide incentive bonuses that reward the
CEO or any of the Other Top Four Executives for achieving certain
performance goals or 57 8

59 6

T

No T

No T Yes T

objectives?

T

IF YOU ANSWERED "NO" TO BOTH PARTS OF

Yes T

Yes T

No T QUESTION #22, SKIP TO QUESTION #26;

otherwise, continue ...

N/A T N/A TT

Yes T

Any of the Other Top Four

                                       T

                                      No T

                                      No T

                                      CEO

Executives

23. What is the method for calculating

T

Yes Tincentive bonuses? Yes T

a) Percentage of salary only 406 3

426 1

b) Another method, please describe:

                                     238 7

238 6

Any of the Other Top Four CEO Executives

24. Are minimum performance targets set under which no incentive bonuses,
regardless of how calculated, would be 56 1 2

581 0 paid?

Any of the Other Top Four CEO Executives

                                   Yes No N/A

Yes No N/A

25. Are maximum performance targets set over which such incentive bonuses,
regardless of how calculated, would be 55 2 2

572 0 capped?

                                       11

Benefit Programs and Perquisites

Any of the Other Top

No T

No T

26. Does your hospital system provide the following CEO

Four Executives

nonqualified deferred compensation plans to its CEO or

any of the Other Top Executives?

a) Excess retirement benefit plan

15 50

Yes T 15

50 Yes T

b) Supplemental executive retirement plan (SERP) 51 14

50 15

c) Split-dollar life insurance plan 18 47

18 47

d) Section 457(b) plan No T

                                    No T 559

54 10

e) Section 457(f) plan 33 31

34 31

f) Section 403(b) plan 45 20

46 19

g) Other (please specify)

12 36

Yes T 1336 Yes T

Any of the Other Top Four Executives

27. Does your hospital system make severance payments to CEO departing
CEOs or any of the Other Top Four Executives in the following situations?

a) Resignation (for any reason) 6 59

6 59

b) Involuntary termination 61 4

60 5

c) Change of corporate control events 41 24

37 28

d) Other (please specify) I

16 30

12 34

28. Has your hospital system had anyone in the CEO or Other Top Four
Executive positions leave since January 1, 2004?

41 Yes

24 No AE SKIP TO QUESTION #30

I The hospital systems cited numerous other situations whenseverance
paymentsare made to executives, such asa substantial change in duties,
death, disability, and breach of compensationpayment obligation.

                                       12

Any Departing Other

T

Departing CEO No T

Top Four Executives

29. Since January 1, 2004, did your hospital system make severance
payments to departing CEOs or any of the Other Top Four Executives in the
following situations?

No T

a) Resignation (for any reason) 38

5 35

Yes T 2

Yes T

b) Involuntary termination 3 37

20 21

c) Change of corporate control events 0 40

1 39

No T T

d) Other (please specify)

2 30

3 30

Any of the Other Top

                                   Yes T CEO?

Four Executives?

No T

State law

State law prohibits prohibits

                                     Yes T

30. Does your hospital system make loans to its CEO or any of the Other
Top Four Executives?

Note: Answer "State Law Prohibits" if state law

254 9

prohibits nonprofit organizations from making 2 53 10 loans to executives
and the hospital system does not make such loans.

                                     N/A T

                                      No T

                                     Yes T

                                     N/A T

                                      No T

                                     Yes T

  IF YOU ANSWERED "NO" or "STATE LAW PROHIBITS" TO BOTH PARTS OF QUESTION #30,
                 SKIP TO QUESTION #36; otherwise, continue ...

                              Any of the Other Top

                                Four Executives

31. Since January 1, 2004, has your hospital system CEO

made loans to its CEO or any of the Other Top

Four Executives for the following purposes?

a) Purchasing a home 020

                                      020

b) Purchasing investments or making equity contributions in for profit
entities affiliated with the 020

                                      020

hospital system

c) Purchasing investments in entities not affiliated with

                                      020

the hospital system 020

d) Other reasons, please list:

                                      020

                                      020

                                       13

32. Which entity or person within your hospital system has primary
responsibility for each of the following with respect to the CEO? Note: If
multiple entities or persons have primary responsibility, please check the
box in the last column, list or describe. Mark one response _ for each
subquestion.

Executive Entire Board Compensation Chairperson Committee of the Board
Other Entities or Persons T T TT (please describe)

a) Approving loans to the CEO 0011AE( )

b) Monitoring the repayment of loans made to the CEO to ensure 0002AE( )
accountability

c) Approving the forgiveness of loans 0110AE( ) made to the CEO

33. Which entity or person within your hospital system has primary
responsibility for each of the following with respect to the Other Top
Four Executives? Note: If multiple entities or persons have primary
responsibility, please check the box in the last column, list or describe.
Mark one response _ for each subquestion.

Chief

                                   Executive

Executive

                     Entire Board Compensation Chairperson

Committee of the Board Officer Other Entities or Persons

T TTTT (please describe)

a) Approving loans to the Other Top 01010AE ( ) Four Executives

b) Monitoring the repayment of loans made to the Other Top Four 00011AE (
) Executives to ensure accountability

c) Approving the forgiveness of loans made to the Other Top Four 01010AE (
) Executives

any of the Other Top Four the CEO?

Executives?

Yes No N/A

Yes No N/A

TTT

TTT

34. Since January 1, 2004, has your hospital system forgiven any loans
owed by ... 1 1 0

110

35. Since January 1, 2004, has your hospital system refused to accept any
loan payments owed by ... 0 2 0

020

                                       14

36. Does your hospital system provide the following perquisites to the CEO
or any of the Other Top Four Executives?

a) Personal travel expenses b) Automobile-related expenses c) Financial or
tax planning d) Tax preparation e) Attorneys fees f) Memberships in
recreational or social clubs

g) Other, please specify: J

37. Since January 1, 2004, has the CEO or any of the Other Top Four
Executives had the following expenses paid for on their behalf (or
reimbursed) from any party related to either the hospital system or its
affiliates?

a) Personal travel expenses b) Automobile-related expenses c) Financial or
tax planning d) Tax preparation e) Attorneys fees f) Memberships in
recreational or social clubs g) Other, please specify:

Any of the Other Top Four

CEO

Executives

No T

No T

3 62

2 62

55 10

52 12

Yes T

Yes T

25 40

23 42

17 48

13 52

7 58

7 58

No T No T

45 20

35 30 26 26 23 30

Yes T Yes T

Any of the Other Top Four

CEO

Executives

3 62

2 63

10 55

10 55

4 61

4 61

5 60

4 61

1 64

1 64

11 54

10 55

2 47

2 47

J The other perquisitesnotedby the hospital systems included cellular
telephonesand Blackberrys, reimbursement of professional duesand annual
membership fees, fitness center membership or home fitness equipment,
professional development and continuingprofessional educationprograms, and
allowances that canbe used at the discretion of the executive ona variety
ofperquisites.

                                       15

Spouses of any of the Other

Top Four Executives

38. Does your hospital system provide the Spouse of CEO

No T

No T

following perquisites to the spouses of the CEO

or any of the Other Top Four Executives?

a) Personal travel expenses K 13 51

8 56

0 64

Yes T 0

64 b) Automobile-related expenses Yes T

c) Financial or tax planning 0 64

0 64

d) Tax preparation 0 64

0 64

e) Attorneys fees 0 64

0 64

No T

No T

f) Memberships in recreational or social clubs 0 63

0 64

g) Other perquisite, please list:

5 48

3 49

                                     Yes T

                                     Yes T

Family members

Family members

(other than spouse)

of any of the Other Top Four following perquisites to family members other
of the CEO

39. Does your hospital system provide the (other than spouse)

Executives

than spouses of the CEO or any of the Other

Top Four Executives?

a) Personal travel expenses 1 63

1 63

b) Automobile-related expenses 0 64

0 64

c) Financial or tax planning 0 64

0 64

d) Tax preparation 0 64

0 64

e) Attorneys fees 0 64

0 64

f) Memberships in recreational or social clubs 0 64

0 64

g) Other, please specify:

0 51

0 51

K Hospital systems reported that they maypay for the travel expenses of
spouses when theyare accompanying the top executives to certainbusiness
events, retreats, or educational seminars.

                                       16

1. Does the policy describe the documentation necessary to support
       international business travel expenses ... l
2. Since January 1, 2004, has the CEO or any of the Other Top Four
       Executives had any international travel expenses paid for on their
       behalf (or reimbursed) from any party related to either the hospital
       system or its affiliates?
3. Are the CEO's travel expenses ...

1

a) approved prior to being incurred?b) reviewed after being incurred?

48. Are any of the Other Top Four Executives' travel expenses ...

a) approved prior to being incurred?

b) reviewed after being incurred?

6 Yes AE 59 No

64 Yes AE 0 No

15 Yes AE 50 No

64 Yes AE 0 No

for any of the Other for the CEO? Top Four Executives?

No T

No T

50 12

49 12

Yes T

Yes T

Any of the Other Top Four Executives

No T CEO No T

Yes T Yes T

21 44

25 40

What entity or person approves these expenses? please specify:

What entity or person reviews these expenses?

please specify:

What entity or person approves these expenses? please specify:

What entity or person reviews these expenses?

please specify:

    1. Does your hospital system pay for entertainment expenses?
    2. 63 Yes 2 No AE SKIP TO QUESTION #56
1. Does your hospital system have a written policy covering entertainment
       expenses?

56 Yes 7 No AE SKIP TO QUESTION #53

18

for any of the Other Top for the CEO? Four Executives?

No T No T

51. Does the policy describe what are legitimate business entertainment
expenses ... 53 2

52 2

Yes T

Yes T

53 1 support business entertainment expenses ...

52. Does the policy describe the documentation necessary to 55 0

No T

53. Are the CEO's entertainment expenses ...

No T

    a) approved prior to being incurred?What entity or person approves these
                                   expenses?

                                    3 Yes AE

please specify:

Yes T 59 No

b) reviewed after being incurred? What entity or person reviews these expenses?

60 Yes AE

1 No please specify:

                                     Yes T

54. Are the Other Top Four Executives' entertainment expenses ...

a) approved prior to being incurred? What entity or person approves these
                                   expenses?

                                    7 Yes AE

please specify: 55 No b) reviewed after being incurred? What entity or
person reviews these expenses?

                                   59 Yes AE

                              2 No please specify:

Any of the Other Top Four

CEO

Executives

55. Does your hospital system pay for the following expenses for which its
CEO or any of the Other Top Four Executives can attend?

a) Sports events 28 34

29 33

b) Holiday or other company parties 49 13

49 13

c) Meetings, retreats, or other off-site activities involving trips to
resort locations or private, 48 14

46 16

exclusive clubs

d) Theatre performances 17 45

16 46

e) Other, please specify:

11 32

10 33

                                       19

any of the Other Top the CEO? Four Executives?

No T

or paid T

56. Does your hospital system have written policies:

a) regarding the purchase of gifts by the hospital system and

No T

37 27

given by... 38 26

Yes T

b) regarding the purchase of gifts by the hospital system

34 30

33 31

for... Yes T

Any of the Other Top

No T Four Executives

                                 CEO or paid T

57. Since January 1, 2004, has your hospital system had an internal audit
of the following for the CEO or any of the Not

Not

Other Top Four Executives? Note: If any of the following No T

offered

is not offered or paid for by the hospital system, check the offered
corresponding response.

                                  Yes T Yes T

a) Travel expenses 4023 0

4123 0

b) Automobile-related expensesM 2332 7

2431 7

c) Loans and loan repayments 0 13 51

0 13 51

d) Memberships in recreational or social clubsN 2131 12

1728 19

e) Entertainment expenses 3922 3

4020 4

f) Other perquisites, please specify:

9 31 14

1030 14 g) Components of other compensation, please specify: 8 30 12

7 32 12

M

Two systems reported having an audit of these expenses for the CEO and the
other top four executives but reported that they did not provide this
perquisite to the CEO or other top four executives. One of the systems
explained that their audits were of auto expenses as part of executives'
travel reimbursement and the other system stated that audits were
performed in 2004 when they used to explicitly pay for automobile
expenses, but in 2005 they began granting executive business allowances
that covered various types of expenses, including auto expenses. Also, 1
other system reported having an audit of these expenses for the other top
four executives but reported that they did not provide this as a
perquisite to the other top four executives. An explanation was not
available from this system.

N

One system reported having an audit of membership expenses for the CEO and
the other top four executives but reported that they did not provide this
as a perquisite to the CEO and the other top four executives. This system
stated that they had an audit in 2004 when they used to explicitly pay for
membership expenses, but in 2005 they began granting executive business
allowances that covered various expenses including membership expenses.
Also, 1 system for the CEO, and 2 systems for the other top four
executives reported having an audit of these expenses but reported that
they did not provide this as a perquisite. An explanation was not
available for these systems.

                                       20

                 Page 62 GAO-06-907R Nonprofit Hospital Systems

Any of the Other Top CEO Four Executives

58. Since January 1, 2004, has your hospital system had an

external audit(separate from the annual financial or paid T

  statement audits) of the following for the CEO and the

Not

  Other Top Four Executives? Note: If any of the following Not

offered

offered No T

is not offered or paid for by the hospital system, check the corresponding
response.

Yes T 10

a) Travel expenses 55 0

9 55

0

b) Automobile-related expenses 1049 5

1047 7

c) Loans and loan repayments 0 19 46

0 20 45

or paid T

d) Memberships in recreational or social clubs 749 9

6 45 13

No T

e) Entertainment expenses 953 3

754 4

f) Other perquisites, please specify:

2 41 13

2 41 12

Yes T

g) Components of other compensation, please specify:

3 38 15

3 39 14

59. Do you have any other comments regarding this survey? If so, please
type them here.

                                       21

(190151) Page 63 GAO-06-907R Nonprofit Hospital Systems
*** End of document. ***