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with Health Services, while petitioner contracted for the
remaining 80 percent of such physician services directly with
independent physicians. In other words, petitioner’s enrollees
received nearly 80 percent of their physician services from
physicians with no direct link to one of petitioner’s tax-exempt
affiliates.
Petitioner contends that its contracts with independent
physicians are not relevant to the question of whether it
qualifies for tax-exempt status as an integral part of its tax-
exempt IHC affiliates because all such independent physicians
were required to maintain privileges at Health Services’
hospitals. We disagree with the basic premise underlying
petitioner’s argument.
Health Services comprised the hospital division, which
operated a large number of hospitals and clinics, and the
physician division, which employed approximately 400 primary care
and specialist physicians who generally practiced in Health
Services’ clinics and other community-based settings.
Considering that petitioner does not provide free or low cost
health services, we fail to see how petitioner’s operations,
including its heavy reliance on independent physicians, would be
essential to or substantially related to Health Services’ exempt
functions. To the contrary, petitioner’s method of arranging for
its enrollees to receive physician services suggests that
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