Geisinger Health Plan v. Commissioner of Internal Revenue
71 A.F.T.R.2d (RIA) 815, 985 F.2d 1210, 16 Employee Benefits Cas. (BNA) 1577 (1993)
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Rule of Law:
An organization seeking tax-exempt status as a charitable organization under 26 U.S.C. § 501(c)(3) must primarily demonstrate a direct and substantial benefit to the community as a whole, rather than primarily serving the private interests of its paying subscribers, even if it is a nonprofit health maintenance organization (HMO) with a planned subsidy program.
Facts:
- Geisinger Health Plan (GHP) was formed as a nonprofit corporation in 1984 as part of the Geisinger System, a group of nine nonprofit entities involved in health care in northeastern and northcentral Pennsylvania.
- GHP operates as an HMO, serving 17 predominantly rural counties within the Geisinger System's service area, and contracts with other Geisinger System entities and outside providers to arrange for health care services for its subscribers.
- GHP's articles of incorporation state its purpose as exclusively charitable, scientific, and educational under Section 501(c)(3), prohibiting private inurement and dictating asset distribution upon dissolution to a tax-exempt charitable organization.
- GHP is open to all adult individuals residing in its service area who complete a health questionnaire and to groups of 100+ eligible enrollees without a questionnaire, and accepted all but 11% of individual applicants between inception and June 1987.
- GHP subscribers pay for services based on a community rating system and make copayments; individual subscribers pay an additional amount, and coverage is terminated after 30 days notice for non-payment.
- GHP has adopted a subsidized dues program, intended to be funded by charitable donations and operating funds, to assist approximately 35 subscribers unable to pay premiums, but this program has not been implemented due to lack of tax-exempt status recognition and operating losses.
- GHP enrolls some Medicare recipients at a reduced rate and a small number of Medicaid recipients in specific situations, but generally cannot offer coverage to Medicaid recipients without a contract with the Pennsylvania Department of Welfare, which it has not secured.
- At the time the record closed, GHP had enrolled approximately 70,000 paying subscribers.
Procedural Posture:
- Geisinger Health Plan (GHP) applied to the Internal Revenue Service (IRS) for recognition of exemption under 26 U.S.C. § 501(c)(3).
- The Commissioner of the IRS ruled that GHP was not exempt because it was not operated exclusively for exempt purposes and could not vicariously qualify for exemption as an “integral part” of the Geisinger System.
- GHP filed suit in the Tax Court, requesting a declaratory judgment that it was exempt.
- The Tax Court reversed the Commissioner’s ruling, finding that GHP was entitled to tax-exempt status.
- The Commissioner of the IRS appealed the Tax Court's decision to the United States Court of Appeals for the Third Circuit.
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Issue:
Does a health maintenance organization (HMO) that primarily serves its paying subscribers, arranges for but does not directly provide health care services, and has not substantially implemented a subsidized dues program, qualify for tax-exempt status under 26 U.S.C. § 501(c)(3) by demonstrating sufficient community benefit?
Opinions:
Majority - Lewis, Circuit Judge
No, a health maintenance organization (HMO) that primarily serves its paying subscribers, arranges for but does not directly provide health care services, and has not substantially implemented a subsidized dues program, does not qualify for tax-exempt status under 26 U.S.C. § 501(c)(3). To qualify for exemption under § 501(c)(3), an organization must be both organized and operated exclusively for charitable purposes, demonstrating a primary public benefit rather than benefiting private interests. The court applies the 'community benefit' standard established for nonprofit hospitals, finding no reason to distinguish HMOs. While promoting health is a charitable purpose, it must be accompanied by actual charitable activities. Previous IRS rulings and case law, such as Sound Health Association v. Commissioner, indicated that a hospital or HMO could qualify by providing emergency care to all regardless of ability to pay, offering free or reduced-cost care, conducting research, or providing public educational programs. GHP, standing alone, fails to meet this operational test because it primarily benefits only its subscribers. It does not directly provide health care, ensure access for non-subscribers, conduct research, or offer public educational programs. Its planned subsidized dues program, even if implemented, would benefit a minuscule number of individuals (approximately 35) compared to its tens of thousands of paying subscribers, which is insufficient to demonstrate a primary community benefit. The court rejects the argument that merely having an open subscribership with an intended (but unimplemented) subsidized dues program fulfills the community benefit requirement, emphasizing that the focus must be on whether the organization primarily benefits the community. The court remanded the case for consideration of whether GHP could qualify under the 'integral part doctrine' as part of the broader Geisinger System.
Analysis:
This case significantly clarifies the 'community benefit' standard for health care organizations, particularly HMOs, seeking § 501(c)(3) tax-exempt status. It reinforces that merely being structured as a nonprofit or having a charitable mission statement is insufficient; organizations must actively and primarily provide tangible benefits to the community at large, beyond their paying members. The ruling establishes that an unimplemented charitable program or one benefiting a negligible percentage of the population will not satisfy the 'operational test.' The remand concerning the 'integral part doctrine' suggests a potential alternative pathway for complex health systems where individual entities, while not meeting the standard alone, might qualify based on their symbiotic relationship with other tax-exempt components.
