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an appropriate portion of the premiums would be reimbursable to
the hospitals under the then-applicable Medicare regulations and
deductible under the Federal income tax laws. Petitioners
incorporated Parthenon in the State of Colorado because HCA's
chief financial officer, who also was the executive responsible
for petitioners' insurance programs, believed that the goal of
building a legitimate insurance company would be advanced by
having a State-regulated captive insurer, rather than an offshore
company, and because at that time the State of Colorado was the
only State that had adopted a captive insurance statute. In
accordance with Colorado law, the initial capitalization of
Parthenon was $1,500,000, $1 million of which was represented by
an unconditional standby letter of credit in favor of the
Insurance Commissioner of Colorado, and the remainder of which
was in cash.
Parthenon commenced business during January 1977. At all
relevant times, HCA owned all of Parthenon's common stock.
Parthenon did not own stock in any of HCA's other subsidiaries.
Parthenon's Operations During Its Early Years
Parthenon submitted the policy form to be used for general
and hospital professional liability insurance to the Colorado
Insurance Department for approval. The initial policy form
issued by Parthenon to petitioners provided coverage limits of
$250,000 per occurrence and was a claims-made policy form. A
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