## Facts

- Intermountain Health Care, Inc. (IHC) and IHC Health Services, Inc. (Health Services) were recognized as tax-exempt charitable organizations under 26 U.S.C. § 501(c)(3).
- As part of an integrated health-care delivery system, IHC formed three health-plan corporations: IHC Health Plans, Inc. (a state-licensed HMO) and IHC Care, Inc. and IHC Group, Inc. (federally qualified HMOs).
- The health-plan entities sold coverage in exchange for premiums, bore insurance risk, and arranged patient care through provider networks that included IHC-affiliated facilities and independent providers.
- A substantial portion of services furnished to enrollees was provided by independent physicians rather than by Health Services’ employed physicians.
- The IRS revoked Health Plans’ prior § 501(c)(3) recognition and denied exemption to Care and Group, finding the entities were not operating exclusively for exempt purposes.
- The Tax Court sustained the IRS determinations; Health Plans, as successor in interest to Care and Group, appealed.

## Issues

1. Whether the three health-plan entities qualified for exemption under 26 U.S.C. § 501(c)(3) as organizations operated exclusively (i.e., primarily) for charitable purposes.
2. Whether operating an HMO that charges premiums and bears insurance risk can satisfy the § 501(c)(3) operational test based on asserted community benefit and affiliation with exempt hospitals.
3. Whether the entities’ relationship to IHC and Health Services established exemption under an “integral part” theory.

## Decision

- The Tenth Circuit affirmed the Tax Court’s decisions upholding the IRS revocation/denials.
- The court held the entities did not qualify under § 501(c)(3) because they were not operated primarily for charitable purposes.
- The court characterized the entities’ principal activity as risk-bearing insurance functions typical of commercial insurers.
- The court rejected the claim that serving many enrollees, including Medicaid recipients, established sufficient charitable community benefit where coverage was provided in exchange for premiums.
- The court rejected the “integral part” argument, emphasizing the entities’ separate corporate operations and reliance on independent providers.

## Legal Principles

- To qualify under 26 U.S.C. § 501(c)(3), an organization must have a charitable purpose and must operate primarily to accomplish that purpose.
- “Charitable” requires a meaningful public benefit that supports an inference that the organization’s primary objective is community benefit rather than commercial activity.
- An HMO-like entity that primarily sells coverage for premiums and performs risk-bearing insurance functions generally does not meet the operational requirement absent substantial charitable activities (such as significant free or below-cost care attributable to the entity itself).
- Affiliation with, or contribution to, a broader integrated system containing exempt providers does not by itself confer § 501(c)(3) status on separate corporate subsidiaries; the subsidiary’s own operations control.

## Conclusion

The court upheld the IRS’s revocation and denial of § 501(c)(3) status because the health-plan subsidiaries functioned primarily as premium-funded, risk-bearing insurers and did not demonstrate operations chiefly directed to charitable community benefit, nor did their relationship with exempt hospital affiliates convert them into charitable organizations.


IHC Health Plans, Inc. v. Commissioner of Internal Revenue, 325 F.3d 1188 (10th Cir. 2003)