Favorable Ruling: Taxability of HMOs Under New York City General Corporation Tax


A New York City Tax Appeals Tribunal Administrative Law Judge (ALJ) recently ruled in favor of Aetna, Inc. (Aetna) on whether a health maintenance organization (HMO) was “doing an insurance business” in New York State, thereby exempting it from the New York City General Corporation Tax (GCT).  In New York City, a corporation whose business in New York is an insurance business is not subject to the GCT.  In Matter of Aetna, Inc., TAT(H) 12-3(GC), TAT(H) 12-4(GC) (N.Y.C. Tax App. Trib., ALJ Div., July 22, 2014), the ALJ determined that the HMO at issue was “doing an insurance business” in New York because insurance risk was present in contracts covering the members of the HMO, the members of the HMO spread the risk of loss due to unforeseen medical expenses to the HMO and the HMO was subject to significant regulation under New York State Insurance Law and Public Health Law.

Aetna Health, Inc. (Health), a subsidiary of Aetna, was issued a Health Maintenance Organization Certificate of Authority by the New York State Department of Health, Division of Managed Care, to operate pursuant to Article 44 of the New York State Public Health Law.   Health did business in New York as an HMO, providing health care coverage to its members in exchange for premiums.  The benefits provided by Health generally included primary care physician office visits, hospital visits, routine physical examinations, specialist physician benefits, diagnostic, laboratory and x-ray services and cancer treatment.  For each benefit provided, Health covered a certain amount of the expenses related to the benefit, and, in most cases, its members paid a co-payment relating to the benefit at the time it was received.  Health contracted with a network of health care providers to provide the health care benefits to its members for agreed-to prices.  Health also provided out-of-network coverage to its members in emergency situations.  None of the in-network health care providers were employees of Health, and Health did not directly provide any medical services.

For the tax years at issue, Aetna included Health in its combined reports for GCT purposes.  Aetna later filed refund claims on the basis that Health should not have been included in its original GCT reports because, as an insurance company, it was not subject to the GCT.  The Department of Finance (Department) denied Aetna’s refund claims, stating that Health, and HMOs generally, are not classified as “insurance companies.” 

After a review of federal and New York State authorities, the ALJ determined that the test for determining whether an “insurance” arrangement exists considers the presence of:  “(i) insurance risk; (ii) risk shifting and risk distributing; and (iii) commonly accepted notions of insurance.”  The ALJ then engaged in a thorough examination of federal and New York State authorities on HMOs and concluded that Health was doing an insurance business in New York.  In so concluding, the ALJ rejected the Department’s arguments that Health was instead providing access to health care services (and not insurance); that amendments to Article 33 of the New York State Tax Law in 2009, which added HMOs to the list of entities subject to the New York State premium tax (2009 Amendments), indicated that HMOs were not insurance companies prior to 2009 and that the HMOs were “bound by [their] characterization of the form of [their] business (i.e., that [they] provide access to health care services), in [their] marketing materials and operations.”

Of particular note, the ALJ, relying on the United States Supreme Court decision in Rush Prudential HMO v. Moran, 536 U.S. 355 (2002), noted that HMOs could be (and were) “both insurer[s] and corporation[s] which arrange[] for the provision of medical services.”  In rejecting the Department’s argument based on the 2009 Amendments, the ALJ observed a lack of “specific legislative history,” and pointed out that HMOs were treated as being engaged in an insurance business in many other areas of non-tax New York Law, such as the Insurance Law and the Public Health Law.

The Department has 30 days from the determination date to file an appeal.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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