## Facts

- Geisinger Health Plan (GHP) was formed in 1984 as a Pennsylvania nonprofit corporation and operated as a health maintenance organization (HMO) within a network of related nonprofit health-care entities known as the Geisinger System.
- GHP charged fixed prepaid premiums to individual and employer-group subscribers and arranged for participating providers to deliver covered medical services.
- By March 31, 1988, GHP enrolled thousands of individual subscribers and employer groups covering tens of thousands of individuals.
- GHP stated it intended to create a “subsidized dues” program to reduce premiums for subscribers unable to afford full cost and to expand enrollment of Medicare (and possibly Medicaid) beneficiaries.
- During the period relevant to the IRS determination, GHP had not implemented the subsidized-dues program and, in practice, served only paying subscribers; Medicare enrollment was limited.
- GHP sought recognition of exemption from federal income tax under I.R.C. § 501(c)(3) as an organization organized and operated exclusively for charitable purposes by promoting health.
- The IRS denied recognition; the Tax Court granted GHP exempt status; the Commissioner appealed.

## Issues

1. Whether GHP qualified for exemption under I.R.C. § 501(c)(3) as a charitable organization promoting health where it served only paying subscribers at the relevant time but intended future subsidization for needy subscribers.
2. If GHP did not qualify directly under § 501(c)(3), whether it could qualify as tax-exempt as an integral part of related exempt entities in the Geisinger System.

## Decision

- The Third Circuit reversed the Tax Court’s grant of § 501(c)(3) status to GHP on a direct-operational theory.
- The court held that an HMO that intends to subsidize needy subscribers but, at present, serves only paying subscribers does not qualify for § 501(c)(3) exemption on its own operations.
- The court remanded for the Tax Court to consider whether GHP qualified under an integral-part theory based on its relationship to other exempt entities in the Geisinger System.

## Legal Principles

- § 501(c)(3) requires that an organization be organized and operated exclusively for charitable purposes; operational reality controls over nonprofit form and stated intentions.
- Promotion of health may be charitable, but the organization must demonstrate a community benefit that is not primarily commercial in character.
- Future intent to provide charitable benefits (such as subsidizing premiums for the needy) is insufficient without implemented operations showing charitable activity.
- Serving a rural or underserved area, without more, does not establish charitable operation where services are provided through premiums to paying subscribers.
- Under the integral-part doctrine, an entity that does not qualify independently may qualify if it functions as an integral part of an already-exempt organization or system; this requires fact-specific inquiry into functional integration and relationship to the exempt mission.

## Conclusion

The Third Circuit held that GHP’s then-current operations—providing prepaid health coverage only to paying subscribers—did not satisfy § 501(c)(3)’s charitable-operation requirement, and it sent the case back to determine whether GHP could nevertheless qualify as an integral part of related exempt health-care entities.


Geisinger Health Plan v. Comm’r of Internal Revenue, 985 F.2d 1210 (3d Cir. 1993)