A recent revocation of Blue Shield of California's not-for-profit tax status raises questions of whether insurers and not-for-profit providers are doing enough to keep irate taxing bodies from following California's lead.
The revocation “is a significant development and, while speculative, we believe it could be a catalyst for other states to take similar action,” Chris Rigg, an analyst at Susquehanna Financial Group said in a note to investors.
Blue Shield said, in a written statement, that it believes it still meets the requirements for a state income tax exemption and it has challenged the state's ruling.
"The (California Franchise Tax Board) decision has no bearing on our ability to continue to meet the needs of our members and community," the insurer said. "Regardless of whether we prevail in our dispute, we will continue to fulfill our not-for-profit mission.”
The revocation could spur Blue Shield to convert into a for-profit entity, “which if followed by others, could in turn drive further industry consolidation,” said Rigg, who follows for-profit insurers.
Healthcare advocates foresee an active public dialogue, regardless of what happens to Blue Shield's business structure.
“If they remain a nonprofit, then clearly there's a need for a broad debate for how they are using their reserves and what their contribution is to the community good,” said Sandra Shewry, director of state health policy at the California HealthCare Foundation.
Many of the largest hospitals and health systems are sitting on growing piles of cash even as they face requirements, both from the Affordable Care Act and state laws, to prove that they are providing enough charity care to justify their tax-exempt status.
In Pittsburgh, for example, former Mayor Luke Ravenstahl sued healthcare giant UPMC in 2013 to revoke the system's tax-exempt status. The city argued UPMC did not meet the requirements of an “institution of purely public charity” because it did not benefit enough of the city's poorest residents and was overly focused on its bottom line.
UPMC fired back with a lawsuit of its own. But the two sides have since dropped the legal battle after Pittsburgh swore in a new mayor.
Illinois has also aggressively pursued policies to define how not-for-profit hospitals and health systems can keep their exemption from taxes. The conversation intensified after Northwestern Prentice Women's Hospital in Chicago, Edward Hospital in Naperville and Decatur (Ill.) Memorial Hospital lost their property tax-exempt status in 2011 based on their low levels of charity care.
Connecticut floated a bill last year that would require not-for-profit hospitals to pay property taxes. That legislation is still up in the air, but many state residents already have thrown their support behind it.
“The truth is, nobody wants to pay taxes, but everybody wants services,” Daryl Finizio, mayor of New London, Conn., told Connecticut legislators last March. “This bill would more equitably, more strongly and more stably fund the services that everyone, including our colleges and hospitals, want and need.”
Bruce Hopkins, an attorney at Polsinelli specializing in tax-exempt organizations, said hospitals' tax exemptions are based on a “totally different rationale” than those for insurers. Large hospitals have generally had more success defending their tax exemptions through vague community benefit reports and by setting up separate community foundations.
Hopkins is uncertain how the loss of Blue Shield's tax exemption will spill over into the hospital sector. “This has come up over the years of whether the entity is exempt or acting too much like a commercial entity,” Hopkins said. “This (Blue Shield) development is not going to help, but it shouldn't be a direct correlation.”
The Los Angeles Times on Wednesday reported Blue Shield lost its tax-exempt status. The California Franchise Tax Board made the decision in August, but the announcement was buried in the agency's “revoked exempt organizations list.” The CFTB did not comment further.
Blue Shield, the third-largest health insurer in California by market share, has been criticized for extravagant executive pay and higher-than-necessary reserves to pay future claims. Blue Shield ended 2014 with $4.2 billion in its reserve “stabilization fund” in 2014. The company caps net income at no more than 2% of revenue.
All Blue Cross and Blue Shield Association plans pay federal taxes, but they also have their own separate corporate tax rules, which amount to hundreds of millions of dollars in special tax breaks. Many, like Blue Shield of California, are exempt from state income taxes, making California's move noteworthy for other not-for-profit health insurers that face regulatory scrutiny over how well they are protecting their members.
Follow Bob Herman on Twitter: @MHbherman
