Exempt Status of Blue Shield of California Gets Pulled

March 18, 2015       Mark Hrywna and Patrick Sullivan      

Health insurer Blue Shield of California has lost its state tax-exempt status. The California Franchise Tax Board stripped the insurer of its tax-exempt status this past August for reasons unknown, and ordered it to file state income taxes back to 2013. The organization already pays federal income taxes.

No announcement was made of the action and it only recently came to light. The insurer said it is fighting the ruling.

Blue Shield insures about 3.4 million Californians and employs some 5,000 people. According to its 2013 annual financial statement filed with California’s Department of Managed Healthcare (the most recent available), the company took in some $8.6 billion in revenue in that year. The vast majority of that — $7.2 billion — was from premiums. Compensation was listed as $426 million. The company listed its net worth at $4.14 billion for 2013.

Blue Shield of California defended its track record in a statement from corporate communications manager Sean Barry. “Blue Shield of California is a mission-driven not-for-profit health plan with a demonstrated commitment to the community. A longtime supporter of healthcare reform, we limit our net income to 2% of revenue and have devoted $325 million to our foundation’s efforts to improve the health safety net and combat domestic violence,” wrote Barry.

“We pay federal income taxes, the state gross premium tax and Affordable Care Act taxes and fees. We believe we meet the requirements for a state income tax exemption and have challenged the California Franchise Tax Board’s finding to revoke our tax-exempt status,” continued Barry’s statement.

Dan Tahara, spokesman for the California Franchise Tax Board, confirmed the agency revoked Blue Shield of California’s exemption on Aug. 28. He declined to comment on why the exemption was revoked or what prompted the audit. The Tax Board maintains a list of entities that have had tax-exempt status revoked, but “We didn’t publicize it with a news conference or anything like that,” he said.

Blue Shield Public Policy Director Michael Johnson resigned last week and alleged to the L.A. Times that Blue Shield of California has been “shortchanging the public.” He said he plans to launch an online petition calling for the conversion of the organization to a for-profit company and for it to return billions of dollars to the public. Johnson could not be reached for comment.

The company donated some $37.4 million to its own foundation during 2013. The foundation had total assets of $57.3 million, according to its Form 990-PF for 2013.

Nationwide, one in three health plans is with member insurers of the Blue Cross Blue Shield Association, of which Blue Shield of California is a part. Some 26 million Americans get health insurance through a BCBSA member.

Consumer Watchdog, a Santa Monica, Calif.-based nonprofit, filed a class action lawsuit on behalf of Blue Shield of California customers this past September, alleging the organization misrepresented the extent of its provider networks, failed to provide proof of insurance to new customers in a timely fashion, and subjected them to long customer service line wait times.

“Blue Shield misrepresented the doctors and providers in its subscriber network — the old bait and switch,” said Scott Glovsky, an attorney representing Blue Shield customers, via a statement. “Blue Shield betrayed its members’ trust, and left its members with huge medical bills.”

This is not the first time a member of the BCBS Association has had tex exemption issues. In March 2013, Michigan Gov. Rick Snyder signed legislation that allowed Blue Cross Blue Shield of Michigan to transform from a tax-exempt nonprofit to a nonprofit mutual insurer ahead of the enactment of the Affordable Care Act (ACA) by 2014. Blue Cross would start paying $90 million annually in state and local taxes and give $1.5 billion over 18 years to a new Michigan Health Endowment Fund, to benefit children and seniors, which would be overseen by a nine-member board appointed by the governor. In exchange, Blue Cross would be regulated the same way other insurers in the state are, with no mandatory public hearings, according to the Detroit Free Press.

In New Jersey, Blue Cross Blue Shield in 2008 proposed converting to a for-profit entity that would have generated at least $1 billion for the state to support insurance subsidies and public health care improvements. By 2011, however, Blue Cross scrapped the plan as it prepared for federal healthcare laws to take effect in 2014, according to published reports.