Blue Shield of California Loses Its State Tax Exemption

California tax authorities have stripped Blue Shield of California, the state’s third largest insurer, of its state tax exemption and ordered the company to file returns dating to 2013, potentially costing the company tens of millions of dollars.

At issue in the unusual case is whether the company is doing anything different from its for-profit competitors to warrant its tax break. As a nonprofit company, Blue Shield is expected to work for the public good in exchange for the state tax exemption.

Photo by Steve Rhodes via Flickr

Photo by Steve Rhodes via Flickr

The California Franchise Tax Board actually revoked the exemption in August, but the move only became public when it was reported Tuesday by the Los Angeles Times. The board said the rationale behind its decision was “not public information.”

One likely explanation, however, is the $4.2 billion the company is holding in financial reserves. That’s four times larger than the national trade organization, Blue Cross and Blue Shield Association, requires members to hold in surplus to pay out member claims.

Over the past decade, the company has contributed a fraction of that amount — about $325 million — to its charitable foundation. (Kaiser Health News receives financial support from the Blue Shield of California Foundation.)

At the same time, Blue Shield’s premium rates are similar to comparable for-profit competitors, and the company’s former chief executive earned a hefty $4.6 million per year.

Blue Shield of California’s director of public policy, Michael Johnson, resigned last week as after raising concerns internally that the company was not doing enough for the public good. This week he went public with his concerns, faulting the insurer in particular for what he considered paltry annual contributions to its foundation.

“We’re talking about a $10 billion public asset, and the only real return the public is getting is $35 million in charitable contributions each year? That’s just a lousy deal,” he said. “It’s time to cash in that asset.”

“For over 70 years, Blue Shield has been a tax exempt entity, subsidized by taxpayers in order to provide benefits to the public,” Johnson added. “But it’s demonstrated that it’s either unwilling or incapable of serving the public good.”

He argued it is time for the company to be converted to a for-profit owned by private investors, and the assets should be transferred to the public. There’s a precedent for that – in the 1990s, Blue Cross of California, at the time a nonprofit insurer, converted to a for-profit company. Some of the assets held by the nonprofit were used to create large foundations in the state, including the California Endowment and the California HealthCare Foundation. But the difference in that case was that the conversion was the insurer’s choice – it wanted to become a for-profit company.

Blue Shield has challenged the Franchise Tax Board’s decision, insisting that it does meet the requirements for a tax exemption in California.

“Blue Shield of California is a mission-driven not-for-profit health plan with a demonstrated commitment to the community,” the company said in a written statement. “A longtime supporter of health care reform, we limit our net income to 2 percent of revenue and have devoted $325 million to our foundation’s efforts to improve the health safety net and combat domestic violence.”

Blue Shield is already paying federal taxes. Following complaints from rival insurers, Congress passed a tax reform law in 1986 that essentially stripped nonprofit Blue Cross and Blue Shield plans of their federal tax-exempt status.  The plans unsuccessfully argued against the move, saying they deserved the status because of their efforts involving charitable, community-based health care.

Following the change in the law, “non-profit Blues plans have paid billions of dollars in federal income taxes,” said Marie Cocco, a spokeswoman for the Blue Cross Blue Shield Association.

For consumers, the important question is whether Blue Shield is operating any different for-profit insurers, explained Anthony Wright, executive director of California Health Access. “Many consumers would say no.”

Before the Affordable Care Act kicked in, he added, Blue Shield denied coverage to people with pre-existing conditions and offer reduced benefit plans just like for-profit competitors.

Wright added that revoking the company’s tax exemption would be unlikely to raise premiums for consumers but would potentially add significant funds to the state’s coffers, which could be used to bolster the health care safety net and expand insurance options for Californians who remain uninsured.

“It’s good for the state and it’s good for taxpayers, ” he said.

Gerald Kominski, a professor of health policy at the University of California Los Angeles, said that the decision to revoke Blue Shield’s tax exemption “sends a very, very strong message to large nonprofits to be sure that you’re functioning as a nonprofit, that you’re not shielding assets or revenue from taxation and that you’re generally serving the public good.”

Julie Appleby contributed reporting.

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