Wednesday, December 3, 2008

Forbes Magazine on The Meaning of Charity and Nonprofit Health Maintenance Organizations

Forbes.Com has published Supreme Court Question:  What's A Charity?  Here is the introduction:

The U.S. Supreme Court will soon decide whether to take a case that could have a big impact on a wide array of tax-exempt organizations, including hospitals and health maintenance organizations. Vision Service Plan, the nation's largest provider of insurance plans covering eyeglasses and contacts, wants the high court to consider whether the Internal Revenue Service was right to revoke its status as a 501c4 tax-exempt social welfare organization in 2003--a status VSP had held since 1960.

The article quotes Dean Kenneth Starr (counsel to VSP) as predicting that if the Supreme Court lets the lower court opinion stand, it means "the death knell of the nonprofit HMO model."   Dan Zerbe, seems to agree, according to the article.  He is quoted, though, as supporting the denial of 501(c)(3) and (c)(4) status for nonprofit HMO's.  I try to avoid overblown rhetoric (really, I do!) but I have to agree with Starr.  The 9th Circuit upheld the revocation of tax exempt status for VSP on the sole basis that it provided benefits to member-subscribers and therefore conveyed an impermissable private benefit -- never mind that in doing so, VSP also expanded the health care pie to poor people.  The reasoning makes no sense because the subscriber model is the sole mechanism by which nonprofit HMO's can expand access to health care to those unable to purchase their own health care (by leveraging the subscriber group to bargain for lower capitation fees and ultimately expanding the health care pie to the poor).  In other words, the only way to benefit the community writ large is to benefit a few people in particular.  That's just the way it works in a capital market.  To lift all boats, a rising tide must lift yachts as well as row boats.  To deny tax exemption because an identifiable group benefits especially is simply to preclude community benefit.


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