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petitioners' hospitals qualified for reimbursement under the
Federal Medicare program. To make that determination, Blue Cross
was required to confirm that the premiums charged by Parthenon to
petitioners were reasonable in light of comparable commercial
rates, that both premiums and reserves were based on actuarial
determinations, that premiums did not reflect a profit factor,
that Parthenon was duly licensed and met appropriate criteria for
insurance companies set out by the State of Tennessee, that it
had adequate claims administration and adequate risk management,
and that there were no loans or transfers of funds from Parthenon
to any affiliated company other than payment of covered claims.
For each of the years in issue, Blue Cross found that Parthenon
met the required criteria. In audit reports issued for those
years, Blue Cross specifically confirmed the reasonableness,
prudence, and actuarial foundation of the premiums charged by
Parthenon, including the additional premiums charged to fund
deficiencies in the 1984-86 reserves.
Tax Treatment
Parthenon has been included in the consolidated returns
filed by petitioners since it began business during 1977.
Because of disagreement between petitioners and respondent as to
the proper tax treatment of premiums HCA and the sister
subsidiaries paid to Parthenon for earlier tax years petitioners
did not claim a deduction for the increase in insurance reserves
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