Blue Shield of California loses its state tax-exempt status

With billions in the bank, Blue Shield of California loses its state tax-exempt status

By Chad Terhune
Los Angeles Times, March 18, 2015

Authorities have revoked the tax-exempt status of nonprofit Blue Shield of California, potentially putting it on the hook for tens of millions of dollars in state taxes each year.

The move by the California Franchise Tax Board comes as the state's third-largest health insurer faces fresh criticism over its rate hikes, executive pay and $4.2 billion in financial reserves.

The highly unusual action comes after a lengthy state audit that looked at the justification for Blue Shield's taxpayer subsidy.

Now, a company insider has sided with critics. Michael Johnson, who resigned as public policy director last week after 12 years at the company, said the insurer has been "shortchanging the public" for years by shirking its responsibility to Californians and operating too much like its for-profit competitors.

On Wednesday, Johnson plans to launch a public campaign calling on executives to convert the insurer into a for-profit company and return billions of dollars to the public that could be used to bolster the state's healthcare safety net. He estimates the company could be worth as much as $10 billion.

In 1996, a similar conversion of Blue Cross of California — now part of Anthem — generated $3 billion to establish the California Endowment and the California HealthCare Foundation.

The company defends its work on behalf of Californians. It cites its long-standing support of health reform and numerous efforts to make coverage more affordable.

"Blue Shield as a company and management team firmly believes it is fulfilling its not-for-profit mission and commitment to the community," said company spokesman Steve Shivinsky.

In 2011, amid a backlash over rate increases, the insurer capped its profits at 2% of annual revenue and gave back about $560 million to customers and community groups from 2010 to 2012. Blue Shield has also contributed more than $325 million over the last decade to its own charitable foundation.

But some consumer advocates and health-policy experts say those gestures are lacking in light of the company's stockpile of cash.

Blue Shield's surplus of $4.2 billion at the end of 2014 is four times as much as the Blue Cross and Blue Shield Assn. requires its member insurers to hold to cover future claims.

Critics also note the company hasn't served the state's poorest residents on Medi-Cal and it has frequently run afoul of state regulators. The 2011 disclosure of a nearly $5-million salary for its former chief executive drew protests.

Some consumer groups have also questioned whether certain Blue Shield spending is out of line with its nonprofit mission.

For instance, the company contributed about $10 million to defeat a ballot measure last year seeking rate regulation. It spent $2.5 million for a luxury box at the new professional football stadium in Santa Clara, Calif.

Critics have also long complained about Blue Shield's lack of disclosure.

Blue Shield was founded by the California Medical Assn. as part of a national movement by hospitals and doctors to form prepaid health plans.

The company is a "mutual benefit" nonprofit — "dedicated to charitable, religious or public purposes," according to California corporation law.



By Don McCanne, MD

Many of us in California were very upset when Blue Cross of California converted to a for-profit (WellPoint, then Anthem) and immediately changed its behavior to fulfill its responsibilities to its shareholders as a profit-making business. We immediately saw “insurance innovations” that redirected its business goals from taking care of patients to taking care of shareholders.

It was particularly disappointing to see non-profit Blue Shield of California adopt similar insurance innovations in order to remain competitive in the California insurance market. From the perspective of health care “consumers,” Blue Shield and Blue Cross remained virtually indistinguishable.

Blue Shield of California has annihilated the dream of those who believed that the United States could adopt a universal system of private, non-profit insurance companies like they have in Switzerland. There are many serious problems with the Swiss model, but some believed that a market of well-regulated, non-profit insurers would make optimal patient care a priority. Blue Shield of California has now demonstrated to us that this pipe dream would only become another nightmare in the saga of private insurance markets in the U.S.

We need to banish them and establish our own public program - an improved Medicare for all.