HMOs, Private Gain, and Public Benefit

In PLR 201412018 released March 21, 2014, the Service reiterated and unfortuntely continued its longstanding antipathy to granting (c)(3) status to HMOs. I will never understand the logic behind that antipathy.  It is doing more harm than good.  The basic reasoning is this:  An organization that delivers health care to paying subscribers, directly or indirectly, does not confer a public benefit because it benefits its subscibers.   The Service maintains this point even if the organization maintains a program whereby those unable to pay the subscription price can become members.  Logically, membership, and especially membership combined with a subsidy for the poor who can't afford the membership fee, should lead to the exact opposite result.  The membership characteristic of HMOs increases health care for everyone and thereby benefits the community.   

The letter ruling concisely describes the three primary cases (Sound Health, IHC, Geisinger) comprising HMO/(c)(3) jurisprudence.  That jurisprudence holds that a membership requirement is inherently inconsistent with health care charitable tax exemption.  Presumably, a staff model HMO that provided health care services without requiring membership would be able to achieve charitable tax exempt status.  The existence of a membership requirement-- no matter how large and accessibe the club -- turns what would be "public benefit" into "private benefit."  The problem is that whatever benefit HMOs convey results ecisely from the membership requirement.  The membership requirement is the sine qua non of HMOs.  It allows an insurer to herd large groups of consumers with aggregate bargaining power.  Membership means that subscribers will consume health care services only within network, giving the network itself bargaining power.  That bargaining power is, in turn, wielded in a manner that holds costs down presumably resulting in more health care for everyone.  This is all very simplified, I'm sure, but the point is that without a membership requirement there is no point to HMO's and their beneficial effect.  To deny tax exempt status to HMO's based on the membership requirement is really to conclude that HMO's can never be tax exempt even though it is through HMO's that health care costs are better controlled and health care is rendered more accessible to everyone, including the poor.  Hasn't the market proven this? 

Ultimately, it is the membership requirement that increases the amount of health care to the community.  The organization in Sound Health, by the way, was really just  a hospital that also engaged in HMO activities as an insubstantial part of its activities.  The court called it a "staff model HMO," meaning that it had doctors and other health care service providers on staff who provided health care to patients even if they were not part of the club.  It is the hospital analog to the physician who makes house call. It calls to mind Rockwellian memories but is ultimately inefficient in the sense that it can never provide the most health care for the most people.  The old way is too expensive and results in less health care to the community.  The contract model HMO -- an insurer that brokers health services by connecting member/patients with health care service providers -- will ultimately provide more health care for more people.  Tax exemption jurisprudence has the matter bass ackwards to the extent it affirms the inefficient staff model HMO with no membership requirement but condemns the contract model HMO with a membership requirement.  There is more commmunity benefit in the latter than the former. 

What is apparently confusing the Service is the reality that you can't have public benefit without private gain.  The prevailing jurisprudence condemns HMOs because a defined group of people (the members) benefit, hence the terminal appellation "private benefit."  But this ignores the world in which nonprofit entites necessarily exist.  In a capitalist world, indeed in the natural world, someone must benefit in particular if everyone is to benefit in general.  You can't have public benefit without private gain.  In colleges and  universities, for example, faculty must be paid and individual students must graduate if the community -- the public -- is to benefit in general from the production and consumption of knowledge.  Public benefit derives from private gain.  Without private benefit there can be no public benefit. 

The continued insistence that HMO's can only be granted tax exemption in the complete absence of private gain is therefore oxymoronic.  If tax exemption jurisprudence is based on expanding the health care pie so the community receives more rather than less health care, that jurisprudence needs to get rid of the notion that a membership requirement is inherently inconsistent with 501(c)(3) jurispurdence. 

dkj