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IRS.gov Website
Publication 557
taxmap/pubs/p557-038.htm#en_us_publink1000200419

501(c)(26) - State-Sponsored High-Risk Health Coverage Organizations(p59)

rule
A state-sponsored organization established to provide medical care to high-risk individuals should apply by letter for recognition of exemption from federal income tax under section 501(c)(26).
To qualify for exemption, the organization must be a membership organization established by a state exclusively to provide coverage for medical care on a nonprofit basis to high-risk individuals who are state residents. It can provide coverage either by issuing insurance itself or by entering into an arrangement with a health maintenance organization (HMO).
The state must determine the composition of membership in the organization. No part of the net earnings of the organization can inure to the benefit of any private shareholder or individual.
taxmap/pubs/p557-038.htm#en_us_publink1000200420

High-risk individuals.(p59)

rule
These are individuals, their spouses and qualifying children, who, because of a pre-existing medical condition:
  1. Cannot get medical care coverage for that condition through insurance or an HMO, or
  2. Can get coverage for that condition only at a rate that is substantially higher than the rate for the same coverage from the state-sponsored organization.