Blue Shield of California Loses Tax-Exempt Status

The California Franchise Tax Board, following a state audit, has revoked the tax-exempt status of nonprofit Blue Shield of California.

The 76-year-old San Francisco-based insurer, which has long paid federal taxes, has amassed $4.2 billion in financial reserves, and the state wants it to file tax returns dating back to 2013. Blue Shield, which said it would protest the state’s decision, could wind up paying millions of dollars yearly to the state.

Last year, Blue Shield of California collected $13.6 billion in revenue; with 3.4 million customers, only nonprofit Kaiser Permanente and for-profit Anthem Inc. rank ahead of it. Defying other insurance companies that opposed the idea, Blue Shield backed universal healthcare in 2002. Criticized in 2011 for its rate increases, Blue Shield accepted a ceiling of 2% of annual revenue for profit and returned roughly $560 million to the public between 2010 to 2012. In another gesture of generosity, Blue Shield gave over $325 million to a charitable foundation it runs.

In 2013, 260,000 members of a Blue Shield individual plan were hit by an 11.7% annual premium increase on average, according to Insurance Department actuaries. That figure was projected at the time to rise to 20.5% by 2015. Blue Shield defended the increase, stating, “Blue Shield has lost tens of millions of dollars in the individual market in recent years and we expect similar losses in 2013.”

But the company’s surplus of $4.2 billion by the end of 2014, four times the total that the Blue Cross and Blue Shield Assn. requires for Blue Shield of California to cover future claims, has raised eyebrows, according to the Los Angeles Times. Other criticisms include the company’s minimal efforts on behalf of the poor using Medi-Cal, the huge salary of its former chief executive, who was paid almost $5 million, $10 million that the company invested in defeating Proposition 45, which championed rate regulation, and $2.5 million spent for a luxury box at the new professional football arena in Santa Clara.

The move to strip Blue Shield of its tax-exempt status has been accompanied by a critic from the inside of the company; Michael Johnson, who just resigned as public policy director, said Blue Shield has been “shortchanging the public” for years. He is expected to commence an online petition drive aimed at Blue Shield’s board on Wednesday to force the company to abandon its non-profit status and assume profit status, as well as to pay billions of dollars to the state to fund its healthcare. He told the Los Angeles Times, “The public is not getting its money’s worth out of Blue Shield now.” He added that he had attempted to discuss the company’s role as a non-profit during the last six months, but his protests were ignored.

Company spokesman Steve Shivinsky responded to the criticisms by stating simply, “Blue Shield as a company and management team firmly believes it is fulfilling its not-for-profit mission and commitment to the community.” The Times notes, “Industry analysts also note that nonprofit health plans favor a bigger surplus because they don’t have the ability to issue stock like a for-profit company or access debt markets in the same way.”