On January 30, the U.S. Court of Appeals for the Ninth Circuit released an unpublished memorandum opinion affirming the decision in Vision Service Plan v. United States, a 2005 district court summary judgment holding that Vision Service Plan of California (VSP) was not entitled to continued recognition of tax exemption as a social welfare organization described in Section 501(c)(4) of the Internal Revenue Code. In keeping with its informal nature, the opinion by the three-judge panel is brief, barely a page and a half of text. The court seemed to agree with at least some of the reasoning applied by Judge Karlton (E.D. Cal.) in the district court in granting the government’s motion for summary judgment. Judge Karlton’s opinion had reasoned that VSP did not operate primarily to promote the common good and general welfare of the community (i.e., it was not a social welfare organization) because it operated like a for-profit business and served only the interests of VSP members, who largely were participants in employer insurance groups and Medicare and Medicaid beneficiaries.

The Court of Appeals appeared to concur that VSP offered some public benefits, but such public benefits were not enough to convince the court that VSP is primarily engaged in promoting the common good and general welfare of the community as required by Treasury Regulations. The court went on to observe that “VSP’s own articles of incorporation state that the primary purpose of the corporation is to establish a fund from payments by subscribers to defray and assume the costs of vision care for those subscribers.” The court stated that this purpose benefits VSP’s subscribers rather than the general welfare of the community. In light of its conclusion that VSP was not primarily promoting the general welfare, the Ninth Circuit declined to address whether VSP carries on a business with the public in a manner similar to that of for-profit organizations.

Vision Service Plan is a case in which unusual facts make for a confounding outcome. Established in 1955, VSP arguably helped make vision care affordable to a greater cross section of the public at a time when such coverage was not widely available, which, one could reasonably argue, promoted social welfare. At the same time, one could argue that VSP also promoted the business interests of optometrists, who, at least in the early days, controlled the organization. If these competing arguments were balanced carefully on the scales of justice, VSP might have tipped matters in its favor with proof of its significant charitable works in extending services to the poor. Instead, when the factual arguments were complete, and Judge Karlton applied an unusually narrow view of the law, VSP was unable to carry the day not because it failed a public-private benefits test, but because it primarily served an enrolled population rather than every member of the public equally. Longstanding IRS positions that were never considered in the district court make clear that even charitable organizations need not serve every individual in a community, and the venerable Sound Health opinion heralds that the presence or absence of barriers to enrollment are a crucial factor. Nevertheless, Judge Karlton determined that VSP was not an HMO and declined to apply IRS and judicial HMO precedents even by extension.

The Ninth Circuit’s Vision Service Plan decision, by affirming the district court summary judgment in an unpublished opinion, affirms on these specific facts the lower court result, but leaves for another day a more principled analysis of whether serving a cross-section of a community on an enrolled basis, at least absent significant enrollment barriers, and serving Medicare and Medicaid patients as well as benefiting low income or charity care patients, is or is not what is meant by promoting social welfare. VSP has other consolidated cases pending at the trial level. Although this win on such unusual facts should not invite any significant change in the IRS’s position, tax-exempt health plans should (i) ensure that they are governed by a community board; (ii) review their levels of community benefit or social welfare activities; and (iii) limit or eliminate barriers to individual and small group enrollment wherever possible.

Vision Service Plan v. United States, No. 06-15269 (Mem. Jan. 30, 2008). For the full text of the opinion, click here.