State revokes Blue Shield of California's tax-exempt status (updated)

Blue Shield of California is challenging a decision by the state Franchise Tax Board that revoked the health insurer's tax-exempt status.

A media representative for the tax board would not comment on why Blue Shield's exemption was revoked quietly back in August. Health policy experts said the company's large reserves, executive salaries and other spending may have drawn the state's attention.

In response to the revocation Blue Shield said: "We believe we meet the requirements for a state income tax exemption." It added: "We limit our net income to 2% of revenue and have contributed $325 million to our foundation’s efforts to improve the health safety net and address domestic violence."

The company said it has appealed the decision to the Franchise Tax Board.

In the meantime, Blue Shield said it complied with the Franchise Tax Board's order to file its California state tax returns for 2013 and 2014.

Insurance Commissioner Dave Jones applauded the Tax Board's decision.

"Blue Shield functions like a for profit [and] charges excessive health care rates, so the non-profit status they’ve used to get tax exempt status...hasn’t resulted in any tangible benefit for consumers, but it has saved Blue Shield money," he said.

The change does not impact the not-for-profit definition of the company or how it operates, except that it will pay taxes, said Paul Ginsburg, Professor of the Practice of Health Policy and Management at the USC Sol Price School.

"What non-profit really means is there are not stockholders that get returns," he said. "Any surpluses they earn stay with the organization and provide their capital for expansion and in a sense are around for rainy days.”

Blue Shield said that the decision would have "no bearing on our ability to continue to meet the needs of our members and community and we remain in strong financial health. Regardless of whether we prevail in our tax dispute, we will continue to fulfill our not-for-profit mission."

The company said it already pays federal income taxes, state gross premium tax and Affordable Care Act taxes and fees.

Ginsburg said the main implications of the change are additional revenue for the state and competitive challenges for Blue Shield. 

Experts said consumers can expect little to no change to their plans.

But this could mean something for the larger healthcare insurance environment, said Glenn Melnick, health economist and professor at the USC Sol Price School.

"There are many other organizations, non profit organizations, that look just like Blue Shield," he said. "Depending on the criteria used to reach this decision I can imagine this same criteria applying to many, many health care organizations. This may be the beginning of a new policy.”

Kaiser Permanente is the other large non-profit health insurers in California. Melnick said most Californians have health insurance with for-profit health insurers. Nationally, consumers are more evenly split between for-profit and non-profit insurers.

This story has been updated.