Academic journal article American Journal of Law & Medicine

Taxation: Global Risk Contracting Arrangements Do Not Affect Organization's Tax-Exempt Status-Priv. Ltr. Rul. 200044039

Academic journal article American Journal of Law & Medicine

Taxation: Global Risk Contracting Arrangements Do Not Affect Organization's Tax-Exempt Status-Priv. Ltr. Rul. 200044039

Article excerpt

Taxation: Global Risk Contracting Arrangements Do Not Affect Organization's Tax-Exempt Status-Priv. Ltr. Rul. 2000440391-On August 3, 2000, the Internal Revenue Service issued a private letter ruling permitting a parent organization of a health care system to retain its tax exempt status even though the parent entered global risk contracting arrangements with insurance companies and health maintenance organizations ("HMOs").2 The petitioning party was classified as a "supporting organization" under section 509(a)(3) of the Internal Revenue Code.3 The organization acted as the parent of a health care system that included tax exempt hospitals, a tax exempt physician clinic, and several other health care related organizations.4 Recently, the organization entered into global risk contracting arrangements with certain insurance companies.5 Pursuant to these agreements, the organization received payments from the insurance companies and HMOs on a percentage-of-premium, permember, per-month basis.6 The capitation payments were received on behalf of the organization's affiliated health care providers and certain specialty care physicians.7

First, the private letter ruling determined that the organization's global capitation contracts were substantially related to its exempt purpose of promoting health.8 It also determined that such agreements were "essentially medical service contracts for the promotion of the health of the community, as provided under Revenue Ruling 69-545 and Revenue Ruling 78-41."9 The organization was found not to experience any private increment other than the incidental private benefit resulting from contracts consisting of risk pool arrangements.10 Further, the organization did not act as a collective bargaining representative between member physicians and HMOs. I

Second, the private letter held that "if the insurance activities do not represent a substantial part of the organization's activities, then the organization is entitled to tax exempt status and the insurance activities will be treated as an unrelated trade or business activity under section 501(m)(2)(A). …

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