Tax Policy and Health Maintenance Organizations: The Case for a Section 501(c)(3) Tax Exemption

Abstract

The Internal Revenue Service typically grants health maintenance organizations (HMOs) and I.R.C. section 501(c)(4) exemption from federal income taxation. If these prepayment group medical providers were classified as section 501(c)(3) tax exempt organizations, however, they would receive many additional advantages including increases in private funding and decreases in material and operating costs. This Note contends that most nonprofit HMOs--whether or not they have qualified under the federal HMO Act--should be granted 501(c)(3) status because they conform with all the specific requisites and general theoretical justifications of a "charitable purpose" tax exempt organization. Specifically, HMOs serve a tax exempt purpose by providing health care, by benefiting the community as a whole, and relieving the government of some of its public health burdens. HMOs comply with further requirements of section 501(c)(3) and its accompanying I.R.C. regulations by serving a broad membership while avoiding insider control or commercial dealings. Therefore, if an organization is a nonprofit prepayment group practice health provider that serves a broad community and provides health benefits without insider control, it should receive a 501(c)(3) tax exemption.