Friday, November 21, 2008

Ken Starr Releases Video Statement on Vision Services Case

Ken Starr, Dean of Pepperdine Law School and now the lead counsel for Vision Services Plan in its appeal from the 9th Circuit decision upholding its loss of tax exempt status under 501(c)(4), has released a video update on the case, available here.

For those late to the VSP saga, Vision Services Plan is a nonprofit HMO-like provider of vision care services. The largest part of VSP's activities involve offering vision health services plans to employers for their employees. The employers or individual members pay a flat fee to VSP for the plan services. The IRS granted VSP exempt status under 501(c)(4) in 1960; it revoked that status in 2003, arguing that VSP no longer was engaged in benefitting the general social welfare, but rather primarily served the private interests of its members. Links to the various opinions in the case (district court and 9th Circuit) and more background can be found in this prior blog post.

Though the VSP case does not deal with charitable exemption under 501(c)(3), it is a poster child for the problems with exempting nonprofit health care organizations generally. The baseline question is the same today as it was when the IRS issued Rev. Rul. 69-545, regarding 501(c)(3) exemption for nonprofit hospitals: what, exactly, distinguishes these organizations, which largely operate by charging fees for their services, from for-profit businesses other than the fact that they are organized as a nonprofit? Some academics in the health care world (e.g., Jill Horwitz of Michigan, Mark Schlesinger of Yale, Brad Gray at the Urban Institute) argue strongly that the nonprofit form itself causes health care providers to act differently than for-profit counterparts. They maintain that substantial empirical evidence supports their position - Jill Horwitz, for example, has done extensive work showing that nonprofit hospitals are more likely to offer unprofitable services than for-profits, and are slower to abandon low-profit services for high-profit ones. On the other hand, I'm a "show me the money" guy. I want individual nonprofits to detail exactly what it is they do differently for their communities than for-profit competitors, and I want exemption standards that require this differential behavior, not standards that hand out exemption to nonprofits under the hope that they will "act better." And I'm middle-of-the-road compared to some, who would grant exemption to health care providers only if they provide free care to the uninsured poor in an amount at least equal to the financial benefit of their exemption. In any event, this issue isn't likely to be resolved any time soon - particularly because a lot of the action today has shifted to the states and state property-tax exemption standards.


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