BLUE SHIELD STRIPPED OF NONPROFIT STATUS IN CALIFORNIA

By Miriam Raftery

March 18, 2015 (San Diego’s East County) – Blue Shield of California, the state’s third largest health insurance company, has lost its nonprofit status.  The California Franchise Tax Board revoked Blue Shield’s nonprofit status in August but the decision was only made public this week in a Los Angeles Times article.

Consumer Watchdog president Jamie Court says, “State tax collectors have finally revoked the nonprofit health insurance company’s tax exemption following years of our criticism about lavish perks, excessive pay, padded bank accounts and huge premium increases.” 

Consumer Watchdog, California Nurses Association and other organizations had recently staged a protest over Blue Shield spending policyholders’ money to buy a luxury skybox at a San Francisco 49ers football game.  Blue Shield was also paying its chief executive a whopping $4.6 million a year in salary and had a healthy $4.2 billion in reserves.

Nonprofit corporations are required to work for the public benefit in order to be tax-exempt.  But Blue Shield contributed only a small amount to its charitable arm, Blue Shield of California Foundation.

Michael Johnson, the company’s former director of public policy, resigned last week after voicing criticizing of Blue Shield for not doing enough for the public.  He says, “We’re talking about a $10 billion public asset and the only real return the public is getting is $35 million a year in charitable contributions each year? That’s just a lousy deal.” 

Johnson contends that Blue Shield is “unwilling or incapable of serving the public good.” He wants to see the nonprofit sold to become a for-profit company with proceeds of the sale donated to benefit the public.

But what does all of that mean for Blue Shield ratepayers?  Some fear rates could rise even further as Blue Shield seeks to recoup money it will now have to pay in state taxes. (Full disclosure: this author holds a Blue Shield policy, at rates that might charitably be described as exorbitant and dramatically higher than rates paid several years ago, for one healthy middle aged adult.)

Blue Shield, however, has challenged the Franchise Tax Board’s decision and claims it meets state requirements for tax exempt status.  A written statement from the company states, “Blue Shield of California is a mission driven not-for-profit health plan with a demonstrated commitment to the community.” The company states that it limits its net income to 2 percent of revenue and has devoted $325 million over the past decade to its foundation’s efforts to “improve the health safety net and combat domestic violence.”

The company has already lost its federal tax exempt status, along with Blue Cross, and is now paying federal taxes, the result of a tax reform law in 1986 following complaints from competitors. KPBS reports that Blue Cross and Blue Shield have since paid billions of dollars in federal income taxes.

The primary beneficiary of the decision will be the state, which stands to reap tens of millions of dollars if the Franchise Tax Board’s decision stands, including back taxes to 2013.