Blue Shield of California loses its state tax-exempt status

Los Angeles Times
March 18, 2015
With billions in the bank, Blue Shield of California loses its state
tax-exempt status
By Chad Terhune

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.

http://www.latimes.com/business/la-fi-blue-shield-california-20150318-story.html

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Comment by Don McCanne

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.