IPA Model HMO Denied 501(c)(3) Exemption
I gotta admit that I’ve never quite understood why an HMO that brokers health care services to its members, with a subsidized dues program so that even poor people can become members, cannot be tax exempt unless it directly provides medical services. In other words, I am not quite sure why a staff model HMO like the one in Sound Health can be a (c)(3) but an IPA model HMO like the one in Geisinger or Intermountain Health Plans cannot be a (c)(3). The Service confirmed that result in Private Letter Ruling 202318021 released last Friday.
Based on the facts presented in your application, you serve a private rather than a public interest because you confer benefits primarily to your members. You operate a healthcare sharing program designed to provide healthcare benefits to subscribing members. Members pay a monthly fee to enroll, and in return, receive benefits including access to telemedicine, discount services, healthcare navigation, and medical bill negotiation. Fees also cover medical expenses that members incur. Like Capital Gymnastics Booster Club, your healthcare sharing plan does not provide substantial healthcare services to the public or members of a charitable class. Membership is open to anyone wishing to enroll and therefore, is not limited to a charitable class. Because your beneficiaries are your only members, you operate substantially for a private rather than a public interest. Consequently, you are providing a cooperative service for your members, like Rev. Rul. 69-175, and are not operating for exclusively exempt purposes as described in IRC Section 501(c)(3) . See Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).
Similar to the organizations in Geisinger and IHC Health Plans , you arrange healthcare services for your subscribers without providing any direct medical care. You arrange these healthcare services and cover health care costs only for your subscribing members and provide no discernable healthcare services to the public outside of your own subscribing members. Consequently, under the community benefit standard, you do not primarily operate for an exempt charitable purpose and therefore do not meet the requirements for tax exemption under IRC Section 501(c)(3).
I understand, though, that charity does not imply that an organization can provide fewer benefits to those who pay less and more benefits to those who pay more. Or is that really true? An exempt hospital can provide bare minimum emergency room triage to its poorest patients and splendid state of the art care to its richest patients and still be tax exempt, can’t it? In the letter ruling, the organization provided more health care brokerage services to those able to pay higher premiums. Still, it apparently indicated a willingness to subsidize poorer patients. That’s the part I can’t get comfortable with.
The only explanation I can come up — one that shows again why health care is instructive for tax exemption jurisprudence generally — is that just being an intermediary (a broker) of otherwise charitable services is insufficient to make intermediary tax exempt. Not even if the intermediary’s brokerage services are subsidized and designed only to recover uncertain future health care costs? Or maybe the Service and Courts don’t believe the organizations really intend to subsidize poor health care consumers. That I can understand, but the cases and rulings aren’t explicit and they throw in the complaint that a membership requirement, even one that is subsidized, necessarily proves private benefit. Why?
darryll jones