September 26, 2008
Jones on the Private Benefit Doctrine and HMO Membership Requirements
Today, at the University of Iowa College of Law's Faculty Speaker's Forum, yours truly will discuss whether the private benefit doctrine precludes tax exemption for nonprofit contract model HMOs that arrange for health care services for their members. Earlier this year, the 9th Circuit Court of Appeals ruled that the membership structure utilized by most, if not all HMO's prevents nonprofit HMOs from attaining or retaining tax exempt status. The gist of my argument (set forth in my petition in support of VSP's cert petition (Download jones_amicus_brief_5.DOC) (Download vsp_cert.Petition.pdf ) is this:
This case involves a matter of extreme importance to the entire nonprofit health maintenance organization (HMO) industry. The court below held, based upon an unexplained and misunderstood application of the private benefit doctrine, that an HMO operating under a membership structure primarily served the private benefit of its subscribers and, therefore, is not entitled to tax exemption under section 501(c)(4) of the Code. It is true that the private benefit doctrine is implicated when a nonprofit organization confers private benefit on non-charitable recipients, such as the members of the HMO. The private benefit doctrine, however, does not preclude an organization from economic dealings with a non-charitable class of persons when doing so is necessary to accomplish its charitable or social-welfare purpose. For example, nonprofit hospitals routinely provide “profits” in the form of compensation to physicians and other service providers that they employ to achieve their charitable healthcare goals. Likewise, nonprofit HMOs cannot possibly achieve their charitable purpose without a membership form of organization.
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