State Revokes Blue Shield of California's Tax-Exempt Status

On the Blue Shield of California Web page called "What Does Being a Not-for-Profit Mean to Us?" the health insurer provides an answer:

Operationally, it means we don’t answer to Wall Street – we don't need to generate returns to shareholders. Philosophically, being a not-for-profit means we’re guided by our mission to ensure all Californians have access to high-quality health care at an affordable price.

Well, the state's Franchise Tax Board may have found that something in that description does not conform with reality. In a story first reported by the L.A. Times and confirmed by Blue Shield of California to KQED, the board has stripped the company of its tax-exempt status.

“Yes the loss of tax exemption is true and we have filed a formal protest of the decision with the FTB," Blue Shield said in an email. The tax board said the revocation occurred on Aug. 28, 2014, and the Times said the company must now file returns from 2013 on. When asked the reason for the revocation, the board responded that is not considered public information and could not be disclosed.

Whatever the reason, the Times said the move could transfer tens of millions of dollars each year from the company to the state. Calling the action highly unusual, the newspaper said it came on the heels of a state audit investigating the justification for the company's tax exemption.

San Francisco-based Blue Shield has faced criticism over a number of issues for the past few years, including executive pay, a proposal to hike rates 59 percent (later dropped), and a large surplus of billions of dollars. It does not currently serve Medi-Cal patients (although it is in a deal to expand into the Medi-Cal market later this year), and it contributed millions to defeat Prop. 45, which lost at the ballot box last year and would have given California's insurance commissioner veto power over health insurance rate hikes.

But perhaps no issue symbolized the lack of a common touch more than the company's spending at least $2.5 million on a luxury box at the 49ers new Santa Clara stadium. The purchase prompted a protest and a petition, and the  advocacy group Consumer Watchdog sent a letter to state Attorney General Kamala Harris stating the purchase was "just the latest example of Blue Shield’s abuse of its privileged 'non-profit' tax status at the expense of California taxpayers and patients."

Consumer Watchdog today sent out a congratulatory email blast over the state's action. "Just like the rest of us, Blue Shield will soon have to pay California taxes," the email said.

The L.A. Times story reported that Blue Shield of California's former public policy director, Michael Johnson, is launching 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."

Blue Shield spokesman Steve Shivinsky told the Times the company "firmly believes it is fulfilling its not-for-profit mission and commitment to the community." In 2011, the company said it would cap profits at 2 percent of revenue and return nearly $300 million to customers and providers.

Update: KQED's Julie Small today spoke with L.A. Times reporter Chad Terhune, who broke the story. He said although the Franchise Tax Board won't disclose the criteria it looked at in revoking Blue Shield's tax-exempt status, in general when nonprofit companies are audited in this way, the board would focus on what benefit they offer to the community and how they are different than for-profit businesses."Are you doing things for the poorest or neediest members of society?" Terhune said. "Are you offering free or subsidized health care? Are you going out of your way to be an insurer of last resort? Are your premiums and prices affordable?"Terhune said the landscape is complicated for large nonprofit health insurers, who have to compete with their for-profit rivals on price. "So you're going to have to do many of the same things. But you're getting a tax break, so you have to act differently."He said Blue Shield gives about $35 million per year to its charitable foundation. It has also given over $500 million in rebates to customers."They'd say,'We are different,'" Terhune said.

We have also updated this story to indicate that Blue Shield has entered into an agreement to provide coverage to Medi-Cal recipients. The deal is expected to close later this year, a Blue Shield spokesman told State of Health.