DocketNumber： No. 14600-99X
Judges： "Wells, Thomas B."
Filed Date： 9/19/2001
Status： Non-Precedential
Modified Date： 4/18/2021
2001 Tax Ct. Memo LEXIS 284">*284 Decision will be entered for respondent.
MEMORANDUM OPINION
WELLS, CHIEF JUDGE: In a final adverse determination letter, respondent determined that IHC Health Plans, Inc. (petitioner) did not qualify as an organization described in
Respondent revoked petitioner's tax-exempt status under
The administrative record was submitted to the Court pursuant to
BACKGROUND
By way of a brief introduction, petitioner and its affiliates, IHC Care, Inc. (Care) and IHC Group, Inc. (Group), operated health maintenance organizations and were part of a number of companies composing the so-called Intermountain Health System. Petitioner offered health plans to individuals, employees of large and small employers, and Medicaid recipients. At the same time that respondent revoked petitioner's tax-exempt status, respondent denied Care's and Group's applications for exemption from Federal income taxation pursuant to
Between 1882 and 1970, the Church of Jesus Christ of Latter-Day Saints (LDS Church) constructed or purchased 15 hospitals in Utah, Idaho, and Wyoming. Prior to 1970, LDS Church hospitals functioned autonomously with little coordination or centralized management.
During 1970, LDS Church organized Health Services Corporation, later renamed Intermountain Health Care, Inc. (IHC), as a nonprofit corporation under the laws of the State of Utah. LDS Church organized IHC for the purpose of assuming ownership and control of its hospitals and to oversee2001 Tax Ct. Memo LEXIS 284">*287 its worldwide health program. Respondent recognized IHC as an organization described in
During 1975, LDS Church determined that its hospitals were not central to its mission and subsequently transferred control of IHC to an independent board of trustees. Between 1975 and the early 1980s, IHC continued to operate its existing hospitals while it constructed or acquired additional hospitals. At the same time, IHC began the process of centralizing its management, coordinating its services, restructuring its debt, and undertaking other steps that its management deemed necessary for IHC to become an integrated multihospital system capable of expanding its services, achieving economies of scale, and improving operational efficiency.
During the early 1980s, in response to myriad changes in the health care field, IHC decided to restructure its operations, which restructuring included the formation of several affiliates. In February 1983, the Internal Revenue Service issued a private letter ruling to IHC approving its corporate reorganization plan.
In 1983, IHC transferred its hospitals2001 Tax Ct. Memo LEXIS 284">*288 and substantially all its remaining operating assets, together with substantially all its outstanding tax-exempt debt and other liabilities, to IHC Health Services, Inc. (Health Services), a newly formed nonprofit affiliate. As a result of this reorganization, IHC ceased to operate hospitals and assumed the position of a parent company overseeing the operations of several nonprofit and for profit affiliates. IHC was Health Services' sole member.
Health Services was IHC's principal health care delivery organization. During 1994, Health Services began to conduct its activities through two divisions, the hospital division and the physician division, which are described in detail below.
1. THE HOSPITAL DIVISION
As of December 31, 1999, the hospital division comprised 22 hospitals (including 2,644 licensed beds) located in Utah and Idaho. All of Health Services' hospitals, with the exception of Primary Children's Medical Center (Primary Children's) and McKay-Dee Institute for Behavioral Medicine (McKay-Dee Institute), were general acute care hospitals that provided inpatient and outpatient services, and varying levels of emergency, ancillary, and specialized services.
Primary Children's2001 Tax Ct. Memo LEXIS 284">*289 specialized in pediatric care in the Intermountain West (defined generally as the area covering eastern Nevada, western Colorado, and the States of Utah, Idaho, Wyoming, and Montana). The McKay-Dee Institute operated a free-standing psychiatric and behavioral health facility located in Ogden, Utah. LDS Hospital, Health Services' largest hospital, located in Salt Lake City, Utah, provided a number of specialized medical services, including open heart surgery, pulmonary medicine, and coronary care.
In addition to traditional hospital services, the hospital division conducted a wide range of special care programs, including women's services, InstaCare Centers, home health care services, ambulatory surgery centers, cardiac services, rehabilitation services, psychiatric services, and occupational health and mission services. Health Services used its mission services as a means to serve the community's charitable needs. Health Services provided quality management services by tracking measures for improvement in clinical care.
All Health Services hospitals participated in Medicare and Medicaid programs for inpatient and outpatient hospital services, and for a number of free-standing ambulatory2001 Tax Ct. Memo LEXIS 284">*290 care services such as ambulatory surgery, home health care, and kidney dialysis. In 1998, Health Services was not reimbursed for approximately $ 254 million in medical care provided to patients covered by Medicare, Medicaid, and other governmental programs. In 1997, 1998, and 1999, Health Services provided charity services to indigent patients valued at $ 26,705,911, $ 31,287,743, and $ 33,449,669, respectively.
Health Services' hospital division employed approximately 120 physicians separate and apart from Health Services' physician division described below. Hospital division physicians provided hospital-based services such as radiology, pathology, and in some cases emergency services.
2. THE PHYSICIAN DIVISION
As of December 31, 1999, the physician division employed approximately 300 primary care physicians (general internists, family practitioners, and pediatricians) and 100 specialist physicians (cardiologists, urologists, obstetricians-gynecologists, radiologists, and surgeons). These physicians generally practiced in Health Services' clinics and other community-based settings. The physician division also provided various ancillary and support services such as diagnostic imaging2001 Tax Ct. Memo LEXIS 284">*291 and laboratory services for patients treated in Health Services' clinics.
The physician division performed the physician credentialing function for Health Services' hospitals and IHC's various health maintenance organizations (described below). All physicians who were granted privileges to practice medicine at Health Services' hospitals were also qualified to act as participating providers for IHC's health maintenance organizations.
Respondent recognized Health Services as an organization described in
As a further step in its reorganization plan, IHC initially intended to organize an affiliate to provide professional, general liability, and worker's compensation insurance. However, upon further reflection, IHC decided to create an affiliate to operate as a State-licensed health maintenance organization (HMO). 2001 Tax Ct. Memo LEXIS 284">*292 IHC's decision was based on its consideration of an HMO's potential for generating medical care cost savings and recognition that HMOs were gaining in popularity. IHC also decided to organize an affiliate to operate as an HMO in order to gain practical experience, to attempt to realize its own cost savings by enrolling IHC employees in the HMO, and to counter a potential competitive threat posed by the combination of national for-profit hospital chains and HMOs (and their perceived capacity to direct large numbers of patients to Health Services' competitor hospitals).
During 1983, IHC organized petitioner as a nonprofit affiliate. IHC was petitioner's sole corporate member. Petitioner's articles of incorporation stated that petitioner
is organized and shall be operated exclusively for charitable,
educational or scientific purposes as described in section
501(c)(3) * * *.
In furtherance of such purposes, the Corporation may
develop and operate alternative health care delivery plans and
financing systems to provide cost-effective and high quality
care to participating employer groups and patients including
2001 Tax Ct. Memo LEXIS 284">*293 elderly and disadvantaged persons, and conduct research and
educational demonstration projects with various health care
delivery systems.
The articles also stated that petitioner's business and affairs would be conducted by a board of trustees elected by IHC and composed of physicians, hospital personnel, and "buyer-employers"; i.e., employers offering petitioner's health plans to their employees. 2001 Tax Ct. Memo LEXIS 284">*294 Petitioner was licensed to operate an HMO in Utah and was permitted to offer a variety of individual and group health plans in the communities that it served. In June 1985, respondent recognized petitioner as an organization described in
1. IHC CARE, INC.
In January 1985, petitioner organized Care as a nonprofit affiliate for the purpose of establishing a federally qualified direct contract model HMO. 2001 Tax Ct. Memo LEXIS 284">*295 Care was licensed to operate an HMO in Utah. In 1985, the Health Care Financing Administration (HCFA) recognized Care as a federally qualified HMO.
In 1985, Care filed with respondent an application for recognition as an organization that is exempt from taxation pursuant to
2. IHC GROUP, INC.
In July 1991, petitioner organized Group as a nonprofit affiliate for the purpose of establishing a federally qualified medical group model HMO. Petitioner was Group's sole corporate member.
Group was licensed to operate an HMO in Utah and Wyoming. In 1991, HCFA recognized Group as a federally qualified HMO.
In 1991, Group filed with respondent an application for recognition as an organization that is exempt from taxation pursuant to
3. IHC BENEFIT ASSURANCE COMPANY
In May 1992, petitioner organized IHC Benefit Assurance Company (Benefit), a taxable business corporation, to underwrite traditional indemnity health insurance risks, particularly point-of- service options offered by petitioner, Care, and Group. 2001 Tax Ct. Memo LEXIS 284">*296 Petitioner was Benefit's sole shareholder.
4. MANAGEMENT SERVICES
Health Services provided management services to petitioner and its affiliates on a centralized basis, including legal services, human resources, public relations, and treasury functions. Each affiliate was subject to an annual intercompany overhead allocation charge for these services.
Petitioner provided general management and administrative services to Care and Group including marketing, sales, enrollment, customer service, claims processing, underwriting and actuarial services, provider relations and contracting, management information systems, and general accounting services.
Petitioner operated an office known as Network Services that negotiated and managed contracts between Health Services and insurance carriers, third-party administrators, and independent HMOs.
Petitioner employed between 600 and 700 employees during the 3-year period 1997 to 1999.
IHC organized IHC Foundation, Inc. (Foundation) to support IHC's and its tax-exempt affiliates' charitable, educational, and scientific activities. Foundation received funds from grants, donations, and other sources. Respondent recognized2001 Tax Ct. Memo LEXIS 284">*297 Foundation as an organization described in
IHC organized IHC Insurance Company, Inc., (Insurance) as a for-profit insurance company. Insurance, which operated on Grand Cayman Island, provided IHC, Health Services, and petitioner with access to reinsurance coverage.
IHC had effective control of its affiliates, including Health Services, petitioner, Care, and Group, all of which were subject to the ultimate governance and control of IHC's board of trustees and corporate managers. Health Services, petitioner, Care, and Group shared many of the same corporate officers and trustees. IHC and its affiliates conducted their strategic planning, established their priorities, and attempted to implement their business plans on an enterprise basis, even though each entity had its own management team and budget.
Petitioner operated as a State-licensed HMO offering health plans known as SelectMed, SelectMed Plus, IHC Care, IHC Care Plus, IHC Direct Care, IHC2001 Tax Ct. Memo LEXIS 284">*298 Direct Care Plus, Health Choice, and IHC Access. Petitioner collected premiums from its enrollees and, as petitioner did not itself provide health care services (as explained below), it arranged for its enrollees to receive comprehensive health care services, including preventive care, outpatient services, inpatient hospital services, emergency services, out-of-area services, and miscellaneous services such as ambulance and pharmacy services.
Petitioner, Care, and Group marketed several different health plans encompassing a range of health services at varying prices. Petitioner offered its various health plans to: (1) Individuals and their families; (2) employees of both large employers (more than 50 employees) and small employers (2 to 50 employees); and (3) individuals covered by Medicaid.
Petitioner entered into some form of written agreement with all enrollees specifying the premium charge and the medical services to which the enrollee would be entitled. Petitioner entered into master group contracts with all employers offering its health plans. Thereafter, during annual open enrollment periods, employees were permitted to enroll in the health plan and select the benefit package2001 Tax Ct. Memo LEXIS 284">*299 of his or her choice.
Although petitioner did not limit its enrollment based upon pre-existing medical conditions, certain plans excluded some pre-existing conditions from full coverage during the first 12 months of membership.
Petitioner applied an adjusted community rating methodology to determine premiums for individual and small employer group enrollees, adjusting its rates for risk factors such as age and gender. 2001 Tax Ct. Memo LEXIS 284">*300 and (2) 2,400 independent physicians.
The following schedule, reflecting petitioner's experience for the years 1997, 1998, and 1999, presents the total amounts (by percentage) that petitioner was billed for physician services provided by: (1) Physicians employed by Health Services' physician division (Employed); (2) independent physicians on petitioner's panel (Not Employed-Panel); and (3) all other physicians (Not Employed-Non Panel).
Year Employed Not Employed-Panel Not Employed-Non Panel
____ ________ __________________ ______________________
1997 21.6% 66.1% 12.3%
1998 21.0% 67.0% 12.0%
1999 20.3% 69.4% 10.3%
Petitioner did not2001 Tax Ct. Memo LEXIS 284">*301 directly own or operate any health care facilities. Petitioner fulfilled its obligation to arrange for its enrollees to receive hospital services by contracting with a panel of hospitals including Health Services hospitals and a limited number of independent hospitals. A substantial portion of petitioner's enrollees' admissions to independent hospitals were for admissions to either University of Utah Medical Center (UMC) or Davis Hospital and Medical Center. In particular, petitioner arranged for its enrollees to obtain medical services from UMC's: (1) Intermountain Burn Center (the only certified burn center in the region); (2) Neuropsychiatric Institute (to provide psychiatric beds when LDS Hospital temporarily exceeded its inpatient capacity); and (3) Pain Management Center. Some UMC admissions were related to a unique relationship between Primary Children's Hospital, a Health Services hospital dedicated to acute care pediatric services, and UMC's specialized genetic research and other pediatric-related teaching and research programs. In addition, petitioner, Group, and Care entered into provider agreements with Davis Hospital and Medical Center, located in Davis County, Utah, because2001 Tax Ct. Memo LEXIS 284">*302 there were no Health Services hospitals in the immediate area.
The following schedule, reflecting petitioner's experience for the years 1997, 1998, and 1999, presents the total amounts (by percentage) that petitioner was billed for inpatient hospital services by: (1) Health Services hospitals (HS); (2) independent hospitals on petitioner's panel (Panel-Not Owned); (3) independent Utah hospitals not on petitioner's panel (Non Panel-Utah); and (4) independent hospitals outside of Utah and not on petitioner's panel (Non Panel-Non Utah).
Year HS Panel-Not Owned Non Panel-Utah Non Panel-Non Utah
____ __ _______________ ______________ __________________
1997 93.5% 1.1% 3.9% 1.6%
1998 91.8% 1.7% 4.7% 1.8%
1999 91.7% 1.8% 4.2% 2.3%
Approximately 60 percent of the inpatient charges for enrollees admitted to Non Panel-Utah hospitals during 1997, 1998, and 1999 was attributable to emergency medical care.
The following schedule, reflecting petitioner's experience for the years 1997, 1998, and 1999, presents the total2001 Tax Ct. Memo LEXIS 284">*303 amounts (by percentage) that petitioner was billed for outpatient hospital visits by: (1) Health Services' hospitals (HS); (2) independent hospitals on petitioner's panel (Panel-Not Owned); (3) independent Utah hospitals not on petitioner's panel (Non Panel-Utah); and (4) independent hospitals outside of Utah and not on petitioner's panel (Non Panel- Non Utah).
Year HS Panel-Not Owned Non Panel-Utah Non Panel-Non Utah
____ __ _______________ ______________ __________________
1997 92.1% 3.6% 3.1% 1.3%
1998 90.4% 4.8% 3.7% 1.2%
1999 89.7% 4.8% 4.2% 1.3%
Petitioner generally compensated its contractor hospitals pursuant to a modified diagnosis related group (DRG) payment system under which an enrollee admitted to a hospital on either an inpatient or outpatient basis would be assigned a DRG and the hospital would be paid a fixed fee consistent with the DRG schedule.
Petitioner offered several plans (described below) that included a "Plus" or a point-of-service option. Enrollees in2001 Tax Ct. Memo LEXIS 284">*304 such plans were permitted to use the services of physicians and/or hospitals outside of petitioner's network with the understanding that enrollees were: (1) responsible for obtaining precertification for major services; (2) required to pay for the services and to seek reimbursement from petitioner; and (3) responsible for any charges exceeding petitioner's fee schedule for covered services.
Petitioner generally required its enrollees to agree to coordinate all of their medical care through a primary care physician or PCP (family practitioners, internists, pediatricians, and some obstetricians/gynecologists). In HMO parlance, PCPs are commonly referred to as "gatekeepers" inasmuch as PCPs generally oversee a patient's medical care, particularly a patient's referrals to specialists known as specialty care physicians or SCPs.
1. SELECTMED
Petitioner's SelectMed plan offered enrollees access to physician medical groups comprising more than 1,500 individual PCPs and SCPs. As previously mentioned, enrollees were required to select a PCP for general medical care and for referral to a SCP.
Petitioner compensated PCPs in Salt Lake, Davis, and Weber Counties2001 Tax Ct. Memo LEXIS 284">*305 in Utah on a discounted fee-for-service basis settled against a capitation budget. 2001 Tax Ct. Memo LEXIS 284">*306 Petitioner compensated SCPs on a discounted fee-for- service basis settled against a capitation budget. As of 1999, petitioner applied a 37-percent discount to estimated market rate fees for SCPs.
2. SELECTMED PLUS
Petitioner's SelectMed Plus plan offered enrollees access to the SelectMed panel of physicians along with a point-of-service option. SelectMed Plus enrollees choosing SelectMed physicians received higher "preferred" levels of service, whereas SelectMed Plus enrollees choosing a non-SelectMed physician received lower "standard" benefits.
Consistent with its policy under the SelectMed plan, petitioner compensated PCPs and SCPs on a discounted fee-for-service basis settled against a capitation budget.
3. IHC CARE
Petitioner's IHC Care plan offered enrollees access to a panel of approximately 2,600 PCPs and SCPs. Like the SelectMed plan, enrollees in the IHC Care plan were required to select a PCP for their general medical care and for referral to a SCP.
Petitioner compensated IHC Care PCPs and SCPs on a discounted fee-for-service basis. During 1999, petitioner applied discounts of 26 percent and 38 percent to estimated market rate fees for PCPs and SCPs, respectively.
2001 Tax Ct. Memo LEXIS 284">*307 4. IHC CARE PLUS
Petitioner's IHC Care Plus plan offered enrollees access to the IHC Care panel of physicians along with a point-of-service option. IHC Care Plus enrollees choosing IHC Care physicians received higher "preferred" levels of service, whereas IHC Care enrollees choosing a non-IHC Care physician received lower "standard" benefits.
Petitioner compensated IHC Care Plus PCPs and SCPs on a discounted fee-for-service basis. During 1999, petitioner applied discounts of 26 percent and 38 percent to estimated market rate fees for PCPs and SCPs, respectively.
5. IHC DIRECT CARE
Petitioner's IHC Direct Care plan offered enrollees access to the IHC Care panel of physicians. However, enrollees in the IHC Direct Care plan were not required to select a PCP or rely on a PCP for a referral to a SCP.
Petitioner compensated IHC Direct Care PCPs and SCPs on a discounted fee-for-service basis. During 1999, petitioner applied discounts of 26 percent and 38 percent to estimated market rate fees for PCPs and SCPs, respectively.
6. IHC DIRECT CARE PLUS
Petitioner's IHC Direct Care Plus plan offered enrollees access to the IHC Care panel of physicians along with a point-of- service option. 2001 Tax Ct. Memo LEXIS 284">*308 IHC Direct Care Plus enrollees choosing IHC Direct Care physicians received higher "preferred" levels of service, whereas IHC Direct Care Plus enrollees choosing a non-IHC Direct Care physician received lower "standard" benefits.
Petitioner compensated IHC Direct Care Plus PCPs and SCPs on a discounted fee-for-service basis. During 1999, petitioner applied discounts of 26 percent and 38 percent to estimated market rate fees for PCPs and SCPs, respectively.
7. HEALTH CHOICE
Petitioner's Health Choice plan offered enrollees access to a panel of 2,600 PCPs and SCPs along with the option to use an independent physician or facility. Health Choice enrollees choosing Health Choice physicians or facilities received higher "preferred" levels of service, whereas Health Choice enrollees choosing non- Health Choice physicians or facilities received lower "standard" benefits.
Petitioner compensated Health Choice PCPs and SCPs on a discounted fee-for-service basis. During 1999, petitioner applied discounts of 23 percent and 28 percent to estimated market rate fees for PCPs and SCPs, respectively.
8. IHC ACCESS
Petitioner entered into a so-called risk contract 2001 Tax Ct. Memo LEXIS 284">*309 Health (Department), effective January 1, 1995 through June 30, 1999, under which it agreed to arrange for the provision of health services to Utah residents eligible for Medicaid benefits. 2001 Tax Ct. Memo LEXIS 284">*310 Petitioner offered Medicaid-eligible enrollees access to a large panel of PCPs and SCPs through its IHC Access plan. IHC Access enrollees were required to select a PCP for general medical care and for referral to a SCP. As of January 1, 1999, petitioner had nearly 36,000 Medicaid enrollees in its IHC Access plan, almost half of the population of enrollees in managed Medicaid plans in Utah.
Petitioner compensated IHC Access PCPs and SCPs on a discounted fee-for-service basis. In addition, these physicians were eligible for certain incentive payments, including an additional payment based on the number of newborn deliveries and one-third of any budget surplus. Petitioner applied discounts of 49 percent and 61 percent to estimated market rate fees for PCPs and SCPs, respectively.
Petitioner was the sole source of health benefits for the employees of IHC and its various affiliates. In this regard, approximately 70,000 of petitioner's enrollees were Health Services' employees, their spouses, or dependents.
The following schedule lists petitioner's total enrollment for 1997, 1998, and 1999, by enrollee class:
Class Jan. 1, 1997 Jan. 1, 1998 2001 Tax Ct. Memo LEXIS 284">*311 Jan. 1, 1999
_____ ____________ _____________ ____________
Individuals 23,809 37,594 42,220
Small employers 44,575 63,892 64,822
Large employers 220,111 242,898 273,376
Medicaid 29,723 33,263 35,902
_______ _______ _______
Total 318,218 377,647 416,320
As of January 1, 1997, 1998, and 1999, petitioner's enrollees from large employer groups constituted 69 percent, 64 percent, and 66 percent of petitioner's total enrollees, respectively.
The following schedule lists petitioner's total enrollment for 1997, 1998, and 1999, by plan type:
Plan Jan. 1, 1997 Jan. 1, 1998 Jan. 1, 1999
____ ____________ ____________ ____________
SelectMed 94,715 134,555 165,240
SelectMed Plus 54,459 53,614 2001 Tax Ct. Memo LEXIS 284">*312 52,143
IHC Care 14,628 13,628 16,424
IHC Care Plus 102,492 112,539 116,838
IHC Direct Care 1,900 7,923 13,245
IHC Direct Care Plus 5,435 15,299 13,381
Health Choice 14,866 6,826 3,147
IHC Access 29,723 33,263 35,902
_______ _______ _______
Total 318,218 377,647 416,320
During 1999, Utah's total population was approximately 2.1 million. During 1999, Utah's total population of enrollees in managed Medicaid programs was 73,503.
The following schedule lists petitioner's total expenditures for medical costs by category for the years 1997, 1998, and 1999.
Category 1997 1998 1999
________ ____ ____ ____
Physicians2001 Tax Ct. Memo LEXIS 284">*313 -- Primary $ 58,264,456 $ 72,942,723 $ 79,496,238
Physicians -- Specialist 72,675,206 93,067,258 100,719,148
Hospital Services 113,138,915 156,678,959 182,015,023
Pharmacy 41,683,824 57,193,724 63,886,920
Miscellaneous 10,028,410 13,565,913 15,817,140
____________ ____________ ____________
Total $ 295,790,811 $ 393,448,577 $ 441,934,469
The foregoing amounts do not include petitioner's selling, general, and administrative costs.
Petitioner generally provided preventive health care services to its enrollees at no additional charge, including annual worksite health screenings, group health risk profiles, a 24-hour nurse hotline, ergonomics assessment and consulting, worksite health seminars, and health newsletters. During 1999, petitioner conducted a number of free comprehensive health screenings for local schools, municipalities, and nonprofit and civic organizations.
Petitioner did not institute any program whereby individuals were permitted2001 Tax Ct. Memo LEXIS 284">*314 to become members while paying reduced premiums. Aside from the free health screenings mentioned above, petitioner did not provide or arrange to provide free health care services.
DISCUSSION
To qualify as an organization described in
Qualification as an organization described in
In the event the Commissioner determines that an organization does not qualify for tax-exempt status, the organization may (after exhausting its administrative remedies) seek judicial review of the matter.
It is well established that the scope of our inquiry is limited to the propriety of the reasons given by the Commissioner for denying an organization's application for exemption.2001 Tax Ct. Memo LEXIS 284">*316 See
The parties do not dispute that petitioner was organized for an exempt purpose within the meaning of
(c) Operational test -- (1) Primary activities. 2001 Tax Ct. Memo LEXIS 284">*317 An
organization will be regarded as "operated exclusively" for one
or more exempt purposes only if it engages primarily in
activities which accomplish one or more of such exempt purposes
specified in
regarded if more than an insubstantial part of its activities is
not in furtherance of an exempt purpose.
The operational test focuses on the actual purposes the organization advances by means of its activities, rather than on the organization's statement of purpose or the nature of its activities. See
Whether an organization operates for a substantial nonexempt purpose is a question of fact to be resolved on the basis of all the evidence presented in the administrative record. See
CHARITABLE PURPOSE
The Supreme Court has stated that "Charitable exemptions are justified on the basis that the exempt entity confers a public benefit -- a benefit which the society or the community may not itself choose or be able to provide, or which supplements and advances the work of public institutions already supported by tax revenues."
COMMUNITY BENEFIT TEST
In
In
We found that Sound Health Association provided community benefits beyond those offered by the hospital deemed exempt in
We rejected the Commissioner's argument that Sound Health Association provided an unwarranted private benefit to its members. We reasoned that, like the hospital deemed exempt2001 Tax Ct. Memo LEXIS 284">*322 in
The tax-exempt status of an HMO arose again in
Geisinger HMO arranged for its enrollees to receive hospital services by contracting for such services with other Geisinger entities (Geisinger hospitals and outpatient clinics that were recognized as exempt organizations) and independent hospitals. Geisinger HMO arranged for its enrollees to receive physician services by contracting for such services with Clinic -- a tax-exempt Geisinger affiliate. Clinic provided physician2001 Tax Ct. Memo LEXIS 284">*323 services through a combination of 400 staff physicians and by contracting with independent physicians for their services. Geisinger HMO was organized as a separate entity to avoid regulatory difficulties and to simplify operations from an organizational and managerial standpoint.
Geisinger HMO offered enrollment to groups (with a minimum of 100 eligible enrollees) and individuals (and certain dependents) residing in 17 of the 27 counties in which the Geisinger system operated. Individual enrollees were required to be at least 18 years of age. Individual enrollees were required to complete a medical questionnaire, whereas group enrollees were not subject to this requirement. All enrollees generally paid the same premium based on a community rating system. During the period in question, Geisinger HMO had approximately 71,000 individual and group enrollees.
Geisinger HMO also enrolled slightly more than 1,000 Medicare recipients at a reduced rate under a "wraparound" plan that covered medical expenses not reimbursed by Medicare. Geisinger HMO also enrolled a small number of Medicaid recipients. Geisinger HMO planned to initiate a subsidized dues program to assist enrollees who might2001 Tax Ct. Memo LEXIS 284">*324 be unable to continue to pay their membership fees as the result of some financial misfortune.
At the conclusion of the administrative proceedings, the Commissioner determined that Geisinger HMO did not qualify for exemption as an organization described in
In Geisinger I, we held that the Commissioner erred in determining that Geisinger HMO did not qualify for exemption pursuant to
In Geisinger II, the United States Court of Appeals for the Third Circuit reversed and remanded our decision in
GHP standing alone does not merit tax-exempt status under
care services itself. Nor does it ensure that people who are not
GHP subscribers have access to health care or information about
health care. According to the record, it neither conducts
research nor offers educational programs, much less educational
programs open to the public. It benefits no one but its
subscribers. 2001 Tax Ct. Memo LEXIS 284">*326 [
Further, the Court of Appeals attached little significance to Geisinger HMO's subsidized dues program, stating in pertinent part:
The mere fact that a person need not pay to belong does not
necessarily mean that GHP, which provides services only to those
who do belong, serves a public purpose which primarily benefits
the community. The community benefited is, in fact, limited to
those who belong to GHP since the requirement of subscribership
remains a condition precedent to any service. Absent any
additional indicia of a charitable purpose, this self-imposed
precondition suggests that GHP is primarily benefiting itself
(and, perhaps, secondarily benefiting the community) by
promoting subscribership throughout the areas it serves. [Id. at
1219.]
Although concluding that Geisinger HMO did not qualify for tax-exempt status on its own, the Court of Appeals remanded the case to the Court for a determination whether the Geisinger HMO qualified for exemption as an "integral part" of its tax-exempt parent.
In Geisinger III, we held that the administrative record did not support Geisinger HMO's claim that it was entitled to tax- exempt status as an integral part of the Geisinger system. Geisinger Health Plan v. Commissioner, 100 T.C. 404-405. As a preliminary matter, we concluded that an HMO may qualify for tax-exempt status as an integral part of a related tax-exempt entity if its activities are carried out under the supervision or control of a related tax- exempt entity and the HMO's activities would not constitute an unrelated trade or business if conducted by the related tax-exempt entity.
"any trade or business the conduct of which is not substantially
related (aside from the need of such organization for income or
funds or the use it makes of the profits derived) to the
exercise or performance by such organization of * * * [the]
purpose or function constituting the basis for its exemption."
* * * [
Because Geisinger HMO enrollees received2001 Tax Ct. Memo LEXIS 284">*328 medical services from hospitals outside of the Geisinger system, and because the administrative record lacked evidence as to whether such services were substantial, we were unable to conclude that Geisinger HMO's activities were substantially related to the activities of its tax- exempt affiliates.
In Geisinger IV, the Court of Appeals affirmed our holding in Geisinger III, albeit on slightly different grounds. Geisinger Health Plan v. Commissioner, 30 F.3d at 501. The Court of Appeals held that an organization may qualify for tax-exempt status as an integral part of its tax-exempt parent if: (1) The organization is not carrying on a trade or business which would be an unrelated trade or business if regularly carried on by its tax-exempt parent; and (2) the organization's relationship with its tax-exempt parent somehow enhances or "boosts" its own tax-exempt character to the point that the organization would qualify for tax-exempt status.
As our examination of the manner in which * * * [Geisinger
HMO] interacts with other entities in the System makes clear,
its association with those entities does nothing to increase the
portion of the community for which * * * [Geisinger HMO]
promotes health -- it serves no more people as a part of the
System than it would serve otherwise. * * * [
Under the circumstances, the Court of Appeals concluded that it was unnecessary to consider whether Geisinger HMO's activities would constitute an unrelated trade or business if regularly carried on by a related tax-exempt entity.
ANALYSIS
Consistent with the preceding discussion, petitioner's qualification for exemption pursuant to
Even assuming that petitioner qualifies as an organization described in
1. WHETHER PETITIONER SATISFIES THE COMMUNITY BENEFIT TEST
The community benefit test requires consideration of a variety of factors that indicate whether an organization is involved in the charitable activity of promoting health on a communitywide basis. Considering all the facts and circumstances surrounding petitioner's operations, we conclude that petitioner did not provide a meaningful community benefit, and, therefore, petitioner does not qualify for exemption pursuant to
Much like the HMOs under consideration in
During 1999, petitioner's enrollees represented approximately one-fifth of Utah's total population and petitioner's IHC Access plan enrollees constituted nearly 50 percent of Utah residents that were eligible for managed Medicaid benefits.
Despite petitioner's open enrollment policy and the wide acceptance of its plans by individuals and groups alike, petitioner's operations differed materially from the operations of Sound Health Association HMO and Geisinger HMO. Significantly, petitioner did not own or operate its own medical facilities, did not employ (to any significant extent) its own physicians, and did not offer free medical care to the needy. Additionally, petitioner did not institute any program whereby individuals were permitted to2001 Tax Ct. Memo LEXIS 284">*332 become members while paying reduced premiums, and, aside from the few free health screenings that petitioner conducted in 1999, petitioner did not provide or arrange to provide any free or low cost health care services. The record does not reflect whether petitioner applied surplus funds to improve facilities, equipment, patient care, or to enhance medical training, education, and research. See
Importantly, the record does not reveal why petitioner applied an adjusted community rating methodology to determine premiums for individual and small employer group enrollees while setting premiums for large employer group enrollees based upon past claims experience. If the difference in treatment of the enrollees caused a disparity in premium costs between the classes of enrollees, there could be an inference that petitioner was benefiting larger employers. However, the record contains no explanation of the difference in treatment of enrollees.
In conjunction with the premium disparity issue, we note that, unlike the arrangement adopted by Sound Health Association, petitioner's bylaws stated that its board of trustees would be composed of a2001 Tax Ct. Memo LEXIS 284">*333 plurality of representatives from the buyer-employer community, with an approximately equal number of physicians and hospital representatives. The composition of petitioner's board of trustees, lacking in representation of the community at large, furthers the inference that petitioner predominantly served the private interests of the larger employers participating in its plans. In the absence of an explanation in the record, the Court is left with doubt as to petitioner's provision of a community benefit. Petitioner has the burden of proof. See
In sum, we hold that petitioner has not established that it provided a community benefit that qualifies it for tax-exempt status pursuant to
2. WHETHER PETITIONER SATISFIES THE INTEGRAL PART TEST
In Geisinger III, we concluded that an organization may qualify for exemption as an integral part of a tax-exempt2001 Tax Ct. Memo LEXIS 284">*334 affiliate if: (1) The organization's activities are carried out under the supervision or control of a tax-exempt affiliate, and (2) such activities would not constitute an unrelated trade or business if conducted by a related tax-exempt entity. Geisinger Health Plans v. Commissioner, 100 T.C. 402-405. There is no dispute that petitioner's activities were carried out under the supervision and control of IHC -- a tax-exempt affiliate. Thus, we need only consider whether petitioner's activities would constitute an unrelated trade or business if conducted by a related tax-exempt entity.
In Geisinger III, we held that, because Geisinger HMO enrollees received some hospital services from independent hospitals, Geisinger HMO had to show that its overall operations were substantially related to the functions of its tax-exempt affiliates.
If petitioner's activities are "conducted on a scale larger than
is 'reasonably necessary'" to accomplish the purposes of the
exempt entities, there is no substantial relationship within the
meaning of the regulations.
at 406.]
Although Geisinger HMO enrollees received all of their physician services through Clinic, an exempt affiliate, Geisinger HMO enrollees received approximately 20 percent of their hospital services from independent hospitals. Because the record did not disclose why Geisinger HMO enrollees received hospital services from hospitals outside of the Geisinger system, we were unable to conclude that Geisinger HMO's operations were substantially related to the functions of its tax-exempt affiliates.
Like Geisinger HMO, petitioner neither owned nor operated any medical facilities and did not employ a significant number of physicians or health care professionals. Petitioner fulfilled its obligation to provide medical services to its enrollees by contracting with physicians (both physicians employed by Health Services and independent physicians) and hospitals (both Health Services hospitals and independent hospitals) to provide such services. In contrast to Geisinger III, however, the administrative record in this case indicates that the medical services that petitioner's enrollees received2001 Tax Ct. Memo LEXIS 284">*336 from independent hospitals were largely attributable to admissions to either UMC or Davis Hospital and Medical Center. Further, these admissions were undertaken to: (1) Take advantage of specialized services (such as burn treatment and pain management) provided at UMC; (2) address occasional shortages of psychiatric beds in Health Services hospitals; and (3) accommodate petitioner's enrollees living in Davis County, Utah, where Health Services lacked a hospital. Because the circumstances under which petitioner's enrollees received hospital services from independent hospitals were limited to situations where Health Services was unable to provide specialized hospital services or were due to geographical expediency, or both, we are satisfied that petitioner's method for arranging for its enrollees to receive hospital services was substantially related to Health Services' tax-exempt function.
However, we do not end our analysis here. In particular, the administrative record reveals that petitioner's enrollees received a substantial portion of their physician services from independent physicians.
In Geisinger III, we did not discuss the provision of physician services to Geisinger enrollees2001 Tax Ct. Memo LEXIS 284">*337 inasmuch as Geisinger HMO arranged for its enrollees to receive all their physician services from Clinic -- a tax-exempt affiliate of Geisinger HMO. Clinic in turn arranged to provide physician services to Geisinger enrollees through its approximately 400 physician/employees (approximately 84 percent of services) and through contracts with independent physicians (approximately 16 percent of services). In contrast, in the instant case, petitioner's enrollees received approximately 20 percent of their physician services from physicians employed by or contracting with Health Services, while petitioner contracted for the remaining 80 percent of such physician services directly with independent physicians. In other words, petitioner's enrollees received nearly 80 percent of their physician services from physicians with no direct link to one of petitioner's tax-exempt affiliates.
Petitioner contends that its contracts with independent physicians are not relevant to the question of whether it qualifies for tax-exempt status as an integral part of its tax-exempt IHC affiliates because all such independent physicians were required to maintain privileges at Health Services' hospitals. We disagree2001 Tax Ct. Memo LEXIS 284">*338 with the basic premise underlying petitioner's argument.
Health Services comprised the hospital division, which operated a large number of hospitals and clinics, and the physician division, which employed approximately 400 primary care and specialist physicians who generally practiced in Health Services' clinics and other community-based settings. Considering that petitioner does not provide free or low cost health services, we fail to see how petitioner's operations, including its heavy reliance on independent physicians, would be essential to or substantially related to Health Services' exempt functions. To the contrary, petitioner's method of arranging for its enrollees to receive physician services suggests that petitioner conducted its operations on a scale "larger than is reasonably necessary to accomplish the purposes of the exempt entities". Geisinger Health Plans v. Commissioner, 100 T.C. 406. Based on the record presented, we hold that petitioner does not satisfy the integral part test. 2001 Tax Ct. Memo LEXIS 284">*339 In sum, petitioner did not provide the community benefit required for petitioner to qualify as an organization described in
To reflect the foregoing,
Decision will be entered for respondent.
1. Respondent's determinations to deny IHC Care, Inc.'s and IHC Group, Inc.'s applications for tax-exempt status are the subjects of the Court's opinions in
2.
(5) "Health maintenance organization" means any person,
other than an insurer licensed under Chapter 7 or an individual
who contracts to render professional or personal services that
he performs himself, which:
(a) furnishes at a minimum, either directly or through
arrangement with others, basic health care services to an
enrollee in return for prepaid periodic payments agreed to
in amount prior to the time during which the health care
may be furnished; and
(b) is obligated to the enrollee to arrange for or to
directly provide available and accessible health care.↩
3. Petitioner's By-Laws stated in pertinent part:
The number of Trustees of the Corporation shall be not less than
four (4) or more than twenty-three (23) persons, as determined
from time to time by the Member. The initial number of trustees
shall be eighteen (18). A plurality of Board members shall
represent the buyer-employer community and an approximately
equal number of physicians and hospital representatives shall be
appointed. Buyer-employer members shall be broadly
representative of the major geographic areas and business
interests (such as manufacturing, retailing, transportation,
finance, utilities, education, etc.) to be served by the
Corporation's health care delivery plans, and physician members
shall also reflect such geographic areas as well as major
medical specialties and modes of practice. * * *↩
4. HMOs are defined for purposes of Federal law under
(a) "Health maintenance organization" defined
For purposes of this subchapter, the term "health
maintenance organization" means a public or private entity
which is organized under the laws of any State and which
(1) provides basic and supplemental health services to its
members in the manner prescribed by subsection (b) of this
section, and (2) is organized and operated in the manner
prescribed by subsection (c) of this section.
Petitioner organized IHC Care, Inc., and IHC Group, Inc. (discussed below) as federally qualified HMOs to take advantage of marketing opportunities presented under the so-called dual choice mandate codified under
5. See
6. Petitioner never employed more than five physicians at a time, and these physicians were hired for the limited purpose of conducting health fairs for enrollees.↩
7. Eighty percent of SelectMed and SelectMed Plus enrollees resided in Salt Lake, Davis, and Weber Counties, Utah. Although the record is not clear on the point, we assume that PCPs from other areas also were compensated on a discounted fee-for-service basis.↩
8. The term "capitation" refers to the practice of paying a physician group a fixed fee for each enrollee under the group's care.↩
9.
10.
11. The integral part doctrine is not codified, but its genesis may be found in
12. Under the circumstances, we need not consider whether we would apply the "boost" test set forth in
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