## Facts

- IHC Health Plans, Inc. was a Utah nonprofit operating as a state-licensed health maintenance organization (HMO) within the Intermountain Health Care (IHC) system.
- IHC’s parent and principal provider subsidiary (including hospitals and employed physicians) held recognition as § 501(c)(3) charitable organizations.
- Health Plans sold prepaid health coverage to large-group, small-group, and individual enrollees, with premiums set using varying pricing methods and a broad range of rates.
- Enrollment was generally open, but Health Plans provided covered care only to enrolled members whose premiums were paid (by the member, an employer, or a government program); it did not furnish care to non-enrollees.
- Health Plans did not own hospitals or clinics and did not employ physicians directly; it arranged care through contracts with the charitable provider subsidiary and with independent hospitals and physicians.
- Most enrollee care was provided by independent providers rather than by physicians employed by the charitable provider subsidiary (about 20% of care came from those employed physicians).
- The IRS revoked Health Plans’ existing § 501(c)(3) recognition on the ground that its primary activity was providing insurance-like coverage for premiums and thus it was not operated exclusively for charitable purposes.

## Issues

1. Whether Health Plans was “organized and operated exclusively for charitable purposes” under I.R.C. § 501(c)(3) when its principal activity was selling premium-funded HMO coverage and bearing insurance risk.
2. Whether claimed community benefits (including substantial Medicaid enrollment) and affiliation with an exempt health-care system established that Health Plans’ primary purpose was charitable rather than commercial.
3. Whether Health Plans’ relationship with an exempt provider subsidiary justified treating it as an exempt component despite contracting broadly with independent providers.

## Decision

- The Tax Court held that Health Plans did not qualify for exemption under § 501(c)(3).
- The court sustained the IRS’s revocation of Health Plans’ exempt status.
- The court found Health Plans’ primary activity was a commercial, risk-bearing insurance function carried out in exchange for premiums.
- The court concluded that asserted community benefits and system affiliation did not show that charitable purposes were primary, and any charitable aspects were incidental to commercial operations.
- Health Plans failed to carry its burden to prove entitlement to exemption.

## Legal Principles

- An organization must be operated “exclusively” for § 501(c)(3) purposes, meaning its primary activities must further exempt purposes; a substantial nonexempt purpose defeats exemption even if exempt purposes are also present.
- Assuming and managing insurance risk in return for actuarially determined premiums is a hallmark of commercial insurance activity and may indicate a substantial nonexempt purpose.
- Serving paying enrollees (including through employer or Medicaid premium arrangements) does not by itself establish a charitable purpose without meaningful free or below-cost services provided by the organization in its own name.
- Affiliation with, or financial and operational ties to, an exempt health-care provider do not automatically confer exemption; each legally separate entity must independently satisfy the operational test.
- Contracting for care through a broad provider network, including independent physicians and hospitals, may support a finding that the entity functions as a commercial health-plan intermediary rather than as a direct charitable care provider.
- The taxpayer bears the burden of proving entitlement to exemption and must show that charitable purposes are primary rather than incidental.

## Conclusion

The Tax Court sustained the IRS’s revocation of IHC Health Plans’ § 501(c)(3) status because the HMO primarily operated as a premium-funded, risk-bearing insurer and did not demonstrate that any community benefit or affiliation with exempt providers made its charitable purposes primary.


IHC Health Plans, Inc. v. Commissioner, T.C. Memo. 2001-246 (2001)