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...