This VSP Tax Exempt issue may be the beginning of something big…or…???
Tax Status of Non-Profit HMO Before Supreme Court
A major shakeout in the $1 trillion non-profit healthcare industry may not be far off. Fortune writer Roger Parloff reports that an HMO called Vision Service Plan has asked the Supreme Court to review an Internal Revenue System decision that strips away its tax-exempt status. VSP, which is represented by Kenneth Starr of Kirkland & Ellis and Pepperdine Law School, claims that the IRS changed its status even though it made no switches in its business model, and no new applicable regulations or laws had been passed. Thomas Hyatt, who has written a treatise on tax-exempt healthcare organizations, told Parloff that the case has implications "for all nonprofits arranging for healthcare, which is the way most modern HMOs operate."
In 1986, at the same time that Congress took away tax-exempt status from companies that provide "commercial-type insurance," it carved out a safe harbor for "incidental health insurance provided by a health maintenance organization of a kind customarily provided by such organization." In other words, HMOs were still tax-exempt. But Parloff reports that in 1999, as VSP was transitioning from a regional provider to a national player, the IRS began to reconsider its tax-exempt status. The agency did not explain, when it revoked VSP's tax-exempt status beginning in January 2003, how the 1986 safe harbor provision figured into its decision.
VSP began paying taxes in 2003, but also sued to recoup them. So far, the company has struck out with both Sacramento federal district court judge Lawrence Karlton and the U.S. Court of Appeals for the Ninth Circuit. VSP filed its cert petition in August, and was quickly supported by amicus briefs filed by three charities it partners with. Acting Solicitor General Gregory Garre is expected to file the government's response on October 10.