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VIRGINIA PROFESSIONAL STDS. REVIEW FOUND. v. BLUME

January 24, 1979

VIRGINIA PROFESSIONAL STANDARDS REVIEW FOUNDATION et al., Plaintiffs,
v.
Michael BLUMENTHAL et al., Defendants



The opinion of the court was delivered by: GREENE

This case is before the Court on cross motions for summary judgment and on defendants' motion to exclude certain documents from the record here under review. The sole issue raised by the summary judgment motions is whether the Internal Revenue Service improperly denied the plaintiffs' applications for exemption from federal income taxation pursuant to section 501(c)(3) of the Internal Revenue Code, 26 U.S.C. § 501(c)(3). The pertinent facts are as follows.

I

 Plaintiffs in this action, Virginia Professional Standards Review Foundation (hereinafter generally referred to as "Virginia") and Shenandoah Professional Standards Review Foundation (hereinafter generally referred to as "Shenandoah"), are non-profit corporations organized under the laws of the Commonwealth of Virginia. Broadly stated, plaintiff Shenandoah's corporate purpose is to establish and perform the services of a professional standards review organization (PSRO) pursuant to Title XI of the Social Security Act, 42 U.S.C. § 1320c et seq. (Supp. V 1975). *fn1" Similarly, plaintiff Virginia was organized for the purpose of assuming responsibilities and duties of a support center for PSROs under the same statutory provisions. *fn2"

 The PSRO program was established by Congress in 1972 pursuant to 42 U.S.C. § 1320c:

 
(In) order to promote the effective, efficient, and economical delivery of health care services of proper quality for which payment may be made (in whole or in part) under this chapter and in recognition of the interests of patients, the public, practitioners, and providers in improved health care services, it is the purpose of this part to assure, through the application of suitable procedures of professional standards review, that the services for which payment may be made under this chapter will conform to appropriate professional standards for the provision of health care and that payment for such services will be made
 
(1) only when, and to the extent, medically necessary, as determined in the exercise of reasonable limits of professional discretion; and
 
(2) in the case of services provided by a hospital or other health care facility on an inpatient basis, only when and for such period as such services cannot, consistent with professionally recognized health care standards, effectively be provided on an outpatient basis or more economically in an inpatient health care facility of a different type, as determined in the exercise of reasonable limits of professional discretion.

 The legislative history of the statute indicates that the PSRO programs were created essentially to act in the government's place *fn3" in ensuring the "effective, efficient and economic" delivery of health care services to Medicare and Medicaid beneficiaries. *fn4" To accomplish this purpose, PSROs are charged with the responsibility of reviewing health care and recommending the imposition of sanctions against health care practitioners and providers who violate their obligations under the Social Security Act. See 42 U.S.C. § 1320c-9(b). The law also provides PSROs with a number of other functions and responsibilities including the development of regional norms and criteria of diagnosis and care (42 U.S.C. § 1320c-5) in order to foster the reduction of unnecessary medical care.

 The Internal Revenue Service has denied applications of both plaintiffs for tax exempt status under section 501(c)(3), on the ground that while the organizations were organized and operated for charitable, or exempt purposes, they had a "substantial non-charitable purpose" as well. As to plaintiff Virginia, the IRS hearing officer stated:

 
Although designation as a PSRO may enable an organization to provide public benefit beyond that provided by the organization inRev.Rul. 74-553, the activities of a PSRO also serve a business interest by maintaining the professional standards, prestige, and independence of the organized medical profession. By cooperating to achieve the purposes of the federal statute and taking self-regulation upon themselves, the physicians who make up PSROs are promoting a common business interest by regulating their own profession and preventing the imposition of regulation from the outside. A PSRO thus has a substantial noncharitable purpose to protect the members of the medical profession . . . You, as a PSRO Support Center, differ from a PSRO in that, rather than providing the review activities directly you provide assistance on a statewide level to local PSROs . . . Although there may be charitable and educational aspects to some of your activities and those activities may result in significant public benefit, you are controlled by the organized medical profession and cannot be considered to be operating free from the common business interest of that profession. The benefits that insure to the medical profession from the operation of the PSRO system by the medical profession itself evidence a substantial noncharitable and noneducational purpose to benefit the private interests of that profession.

 Similar reasoning was applied to plaintiff Shenandoah's application. The hearing officer emphasized that "by cooperating to achieve the purposes of the statute and taking self-regulation upon themselves, the doctors who make up your organization are preventing regulation from the outside" and concluded that "it is apparent you have a purpose of protecting members of the medical profession."

 Plaintiffs' administrative appeals of these decisions were denied on substantially the same grounds and, having exhausted their administrative remedies as required by 26 U.S.C. § 7428, they brought this action pursuant to that statute to obtain a declaratory judgment of ...


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