Small Window Opens on Secret Audit and Revocation of Blue Shield Not-for-Profit Status

Monday, July 06, 2015

Blue Shield and California's Franchise Tax Board are engaged in a high-states battle over the insurer’s not-for-profit status and it is largely taking place outside the public's purview.

Over the weekend, Chad Terhune at the Los Angeles Times reported that he looked at documents related to a 16-page tax board report in June 2014 that was the basis for its decision in August to revoke Blue Shield’s tax-exempt status. But the report has not been made public and the decision wasn’t known until the Times reported it in March.

The board made its decision because it appeared that Blue Shield was functioning like a for-profit corporation. The company’s $4.2-billion reserve fund was about four times that required by law. Insurance rates are high, executive pay is extravagant (a former chief executive made $4.6 million a year) and services are nothing special. It throws a few million dollars at charities and declares itself a not-for-profit. 

Blue Shield, which had $13.6 billion in revenue in 2014, has held tax-exempt status since its founding in 1939.

“Blue Shield is not operating exclusively for the promotion of civic betterment or social welfare,” the Times quoted tax board officials Christie Maddox and Eddie Murillo-Corona from the documents it received. “These stated objectives, particularly those which stress profitability, are inconsistent with an organization organized as a nonprofit which desires tax-exempt status.”

The officials wrote in June: “We assert that the extraordinarily high surpluses set aside as reserves by Blue Shield are not kept for the purposes of stabilizing the organization but rather for the commercial purpose of increasing competitiveness,” according to the Times. “We observed that Blue Shield far exceeded the reserves required either by law or the best practices and standards of the healthcare industry.”

Blue Shield disagrees and is appealing the tax board’s decision. The state’s third-largest health provider said its reserve fund will be reduced to $3 billion after it completes the $1.2-billion purchase of Medi-Cal provider Care1st Health Plan, which was announced late last year.

The Care1st purchase is tied to the not-for-profit status issue. Some argue that a portion of the $4.2-billion reserve should be subject to public and charitable trust obligations and are, indeed, public assets that should be used to lower premiums and better serve patients. Blue Shield says the purchase of Care1st would provide a direct benefit for the public and the 500,000 patients, mostly in the Los Angeles area, who belong to it.

The Blue Shield play for Care1st is part of a wave of merger proposals sweeping through the health care industry. Aetna, Humana, Cigna, Anthem and United Health Group have all danced around each other and eyed lesser acquisitions for months while waiting to see how the U.S. Supreme Court would rule on challenges to the Affordable Care Act (Obamacare).

Last week, Aetna and Humana pulled the trigger, agreeing to a $34.1-billion merger. HealthNet Inc., Molina Healthcare Inc. and others have also been mentioned as potential merger partners.

–Ken Broder


To Learn More:

California Tax Officials Blast Blue Shield in Audit (by Chad Terhune, Los Angeles Times)

Blue Shield's Nonprofit Status Put Under a Microscope in Hearing (by Kathy Robertson, Sacramento Business Journal)

Blue Shield of California Slammed During Public Hearing (by Dori Zweig, FierceHealthPlayer)

Shhh! Blue Shield of California Lost Its Tax-Exempt Status 7 Months Ago (by Ken Broder, AllGov California)

Blue Shield's Proposed Acquisition of Care1st Faces Tough Scrutiny (by Chad Terhune, Los Angeles Times)

Rivals Lurked Behind Aetna’s Deal with Humana (by Dana Mattioli and Liz Hoffman, Wall Street Journal)

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