Tax-exempt HMOs owned by not-for-profit providers should take a close look in the mirror in light of a case pending before the Internal Revenue Service.
That's what tax attorneys are saying as IHC Health Plans, owned by Salt Lake City-based Intermountain Health Care, prepares to fight for its tax exemption.
The IRS has said IHC Health Plans should lose its federal tax exemption because its acts like a for-profit commercial health insurer, not a charity (Dec. 21-28, 1998, p. 4).
The IRS made its determination in a technical advice memorandum released in December. Intermountain has yet to appeal the ruling to federal tax court and instead hopes to work things out informally with the IRS.
IHC officials will meet with the IRS this month to plead their case.
"This should give similar health plans occasion to . . . see if they are in compliance with the tax code," said Douglas Mancino, a tax attorney representing IHC. "If they're not, they should find out what they need to do to get in compliance."
Douglas Hammer, Intermountain's general counsel, declined to comment on the company's defense.
Intermountain formed IHC Health Plans, an umbrella organization comprising four HMOs.
Intermountain is the state's dominant healthcare provider, owning 23 of the state's 40 general acute-care hospitals. It also controls 51% of the state's commercial HMO business.
IHC received its tax exemption in 1984 under Section 501(c)(3) of the federal tax code. Intermountain also has a 501(c)(3) exemption, as do most hospitals. Such a designation recognizes an organization as a tax-exempt public charity.
It is not clear what prompted the IRS to reverse itself. Intermountain has said it is possibly a response to its application for an exemption for two of its HMOs.
Thomas Hyatt, a tax attorney with Ober Kaler Grimes & Shriver in Washington, said IHC may try to persuade the IRS to grant it an exemption under Section 501(c)(4), which recognizes "social welfare" organizations.
That recognition carries fewer tax benefits. For example, a 501(c)(3) organization is eligible for tax-exempt financing and may accept charitable donations, but a 501(c)(4) organization cannot do either.
But in its 15-page ruling in the IHC case, the IRS said that even if IHC did meet the community-benefit requirements of a public charity or a social welfare organization, it would still not merit an exemption, because most of its business is commercial-type insurance.
IHC offers a point-of-service option. The IRS has said it considers POS options to be commercial-type insurance.
Another question raised but unanswered by the IRS ruling is, How much weight does serving Medicare or Medicaid enrollees carry in determining whether an HMO is a public charity?
"So many plans are getting out of the Medicare business," Hyatt said. "If the IRS gets stringent on that, it could threaten a lot of plans."
IHC announced last summer that it was exiting the Medicare managed-care business, citing a $10 million loss in 1997 (June 22, 1998, p. 10).
The IRS ruling did little more than mention that IHC "did not have a Medicare risk-sharing contract."
Meanwhile, IHC's taxable rivals are hoping that the IRS sticks to its guns.
"A competitor that doesn't pay taxes has a distinct competitive advantage," said Kevin Bischoff, senior vice president at Regence Blue Cross and Blue Shield of Utah.
Robert Adams, chief executive officer of United HealthCare of Utah, said the people of Utah would benefit from the additional tax dollars IHC could provide, not to mention the benefit to competing plans.
"It would create a more level playing field," Adams said.