APPEAL FROM THE DECISION OF THE UNITED STATES TAX COURT (No. 90-20793).
Before: Becker and Lewis, Circuit Judges, and Irenas, District Judge.*fn* .
In Geisinger Health Plan v. Commissioner of Internal Revenue, 985 F.2d 1210 (3d Cir. 1993) ("Geisinger I "), we held that the Geisinger Health Plan ("GHP"), a health maintenance organization ("HMO"), was not entitled to exemption from federal income taxation as a charitable organization under 26 U.S.C. § 501(c)(3). We remanded the case for determination of whether GHP was entitled to exemption from taxation by virtue of being an integral part of the Geisinger System (the "System"), a comprehensive health care system serving northeastern and northcentral Pennsylvania. We will affirm the Tax Court's decision that it is not exempt as an integral part of the System.
GHP is a prepaid health care plan which contracts with health care providers to provide services to its subscribers. The facts relevant to GHP's function are detailed in our opinion in Geisinger I, and we need not repeat them here. Instead, far more relevant to this appeal is GHP's relationship with the Geisinger System and its other constituent entities, a relationship which we must examine in some detail to decide the issue before us.
The Geisinger System consists of GHP and eight other nonprofit entities, all involved in some way in promoting health care in 27 counties in northeastern and northcentral Pennsylvania. They are: the Geisinger Foundation (the "Foundation"), Geisinger Medical Center ("GMC"), Geisinger Clinic (the "Clinic"), Geisinger Wyoming Valley Medical Center ("GWV"), Marworth, Geisinger System Services ("GSS") and two professional liability trusts. All of these entities are recognized as exempt from federal income taxation under one or more sections of the Internal Revenue Code.
The Foundation controls all these entities, as well as three for-profit corporations. It has the power to appoint the corporate members of GHP, GMC, GWV, GSS, the Clinic and Marworth, and those members elect the boards of directors of those entities. The Foundation also raises funds for the Geisinger System. Its board of directors is composed of civic and business leaders in the area.
GMC operates a 569-bed regional medical center. As of March 31, 1988, it had 3,512 employees, including 195 resident physicians and fellows in approved postgraduate training programs. It accepts patients without regard to ability to pay, including Medicare, Medicaid and charity patients. It operates a full-time emergency room open to all, regardless of ability to pay. It also serves as a teaching hospital.
GWV is a 230-bed hospital located in Wilkes-Barre, Pennsylvania. It accepts patients regardless of ability to pay, and it operates a full-time emergency room open to all, regardless of ability to pay.
The Clinic provides medical services to patients at 43 locations throughout the System's service area. It also conducts extensive medical research in conjunction with GMC and physicians who perform medical services for GMC, GWV and other entities in the Geisinger System. As of March 31, 1988, it employed 401 physicians. It accepts patients without regard to their ability to pay.
Marworth operates two alcohol detoxification and rehabilitation centers and offers educational programs to prevent alcohol and substance abuse.
GSS employs management and other personnel who provide services to entities in the Geisinger System.
As we noted in Geisinger I, the Geisinger System apparently decided to create GHP after GMC experimented with a pilot prepaid health plan between 1972 and 1985. The experience was positive, and the Geisinger System formed GHP to provide its own prepaid health plan.
It organized GHP as a separate entity within the System (as opposed to operating it from within the Clinic, GMC or GWV) for three reasons. First, HMOs in Pennsylvania are subject to extensive regulation by the Commonwealth's Departments of Health and Insurance. See generally 40 P.S. §§ 1551 et seq. Operating GHP separately enables other entities in the System to avoid having to comply with the burdensome requirements associated with that regulation. Second, those administering the System believe it preferable for GHP's organization and management to remain separate from those of the System's other entities because it serves a wider geographic area than any of those other entities. Finally, under Pennsylvania law at least one-third of GHP's directors must be subscribers. 28 Pa. Code § 9.96(a). Establishing GHP as a separate entity avoids disrupting the governance of the other Geisinger System entities to comply with this requirement. For example, establishing an HMO within GMC would have required GMC to canvass its board of directors to ensure that ...