Not-for-profit health plans might have a harder time justifying their tax-exempt status in the wake of a new federal appeals court decision.
A health plan owned by not-for-profit Intermountain Health Care, Salt Lake City, is not tax-exempt, ruled a three-judge panel from the 10th U.S. Circuit Court of Appeals, Denver, upholding a U.S. Tax Court decision. IHC Health Plans, a wholly owned subsidiary of 21-hospital Intermountain, is Utah's largest health plan with 416,370 enrollees.
Its tax-exempt status was revoked in 1999 by the Internal Revenue Service, which said the company's plans did not operate exclusively for charitable purposes. The court ruled in favor of the IRS decision in 2001.
In its opinion, the 10th Circuit panel said Intermountain's health plans "primarily perform a risk-bearing function" and that "a commercial activity of this nature inspired doubt as to the entity's charitable purpose." The plans "did not operate for the purpose of promoting health for the benefit of the community," the panel said.
Former IRS official T.J. Sullivan, now in private practice in Washington, said the opinion "applies a slightly tougher community-benefit test than we have seen in other appellate decisions." HMOs and providers other than hospitals with open emergency rooms may need to point to free services or subsidies to support tax exemption, he said.
Intermountain officials knew the chance of victory was slim, said the system's attorney, Doug Mancino, of the Los Angeles office of McDermott, Will & Emery.
"The outcome was not surprising," he said. While he did not rule out a petition to the full 10th Circuit, Mancino hinted that further appeal in the case is unlikely.
But the HMO might apply for a 501(c)(4) exemption, which is slightly less stringent than the 501(c)(3) exemption it was denied, Mancino said. IHC has paid taxes since its exemption was revoked in 1999 and does not have any new liability as a result of the decision, he said.