Preventing Private Inurement and Benefit

Members of the nonprofit health entity’s board of directors have a fiduciary duty to protect the assets of the nonprofit. One question is whether the management of the health entity or the directors is benefiting from the conversion in any way. Another related question is whether entity officials did all they could to maintain the hospital or health plan as a nonprofit, and whether other nonprofit options were considered before the directors decided to convert to for-profit status. You may want to request the opportunity to review all board minutes relating to the conversion decision.

Preventing Private Inurement

It is clearly inappropriate for “insiders,” people who have a personal and private interest in the nonprofit’s activities, to personally profit from the hospital or health plan (also known as private inurement). Insiders may include board members, trustees, officers and contributors. By virtue of its 501 (c)(3) tax status, the health entity may not allow any “part of the net earnings [to] inure to the benefit of any individual.” A ruling by the IRS on this issue outlines the considerations required by law to ensure that compensation does not violate the prohibition on private inurement. This ruling, known as IRS Revenue Ruling 69-383 (PDF), outlines considerations to ensure that there is not inappropriate compensation:

1. Does the compensation further the tax exempt purposes of the hospital or health plan?
2. Is the compensation a result of arm's-length bargaining?
3. Is the amount reasonable in terms of the responsibilities and activities required by the job when compared to others having similar responsibilities at similar hospitals or health plans?

Preventing Private Benefit

The private benefit doctrine is related to private inurement in that it prohibits a nonprofit health entity from improperly benefiting an individual. It is different, however, because it does not only apply to “insiders” but to any person, organization or group. All of the entity’s activities must be sufficiently tied to benefiting the public to pass muster under the private benefit doctrine. If either the private inurement or benefit doctrines are violated, the hospital or health plan risks losing its tax-exempt status.

What You Can Do:

• Ask to see the entity’s conflict of interest policies.
• Ask for a disclosure of the ownership and financial interests of both the seller and the buyer.
• Ask for a disclosure- by the health entity’s executives, directors, or others who are connected to the entity- of any prior relationship with the buyer.
• Ask to review any proposed compensation arrangements between the buyer and the seller’s executives, directors or others who are connected in any way to the entity.