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recognition that HMOs were gaining in popularity. IHC also
decided to organize an affiliate to operate as an HMO in order to
gain practical experience, to attempt to realize its own cost
savings by enrolling IHC employees in the HMO, and to counter a
potential competitive threat posed by the combination of national
for-profit hospital chains and HMOs (and their perceived capacity
to direct large numbers of patients to Health Services’
competitor hospitals).
During 1983, IHC organized petitioner as a nonprofit
affiliate. IHC was petitioner’s sole corporate member.
Petitioner’s articles of incorporation stated that petitioner
is organized and shall be operated exclusively for
charitable, educational or scientific purposes as described
in section 501(c)(3) * * *.
In furtherance of such purposes, the Corporation may
develop and operate alternative health care delivery plans
and financing systems to provide cost-effective and high
quality care to participating employer groups and patients
including elderly and disadvantaged persons, and conduct
research and educational demonstration projects with various
health care delivery systems.
The articles also stated that petitioner’s business and affairs
would be conducted by a board of trustees elected by IHC and
composed of physicians, hospital personnel, and “buyer-
employers”; i.e., employers offering petitioner’s health plans to
their employees.3 Petitioner was organized as a separate entity
3 Petitioner’s By-Laws stated in pertinent part:
(continued...)
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