The belated disclosure that not-for-profit insurer Blue Shield of California lost its tax exemption last summer raises questions of whether other not-for-profit insurers and hospitals may face similar scrutiny of their finances and community-benefit record.
The Los Angeles Times reported last week that the California Franchise Tax Board quietly revoked Blue Shield's tax-exempt status in August, but the announcement was buried in the agency's “revoked exempt organizations list.”
Now lawmakers and consumers groups are pressing for answers on how the decision was handled.
Blue Shield, the third-largest California health insurer by market share, which claims 3.4 million members, has been criticized for extravagant executive pay and poor transparency, as well as higher-than-necessary reserves to pay future claims.
Blue Shield ended 2014 with $4.2 billion in its reserve “stabilization fund.” It pays no state taxes but does pay federal taxes.
The Blue Shield decision “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.
Rigg, who follows for-profit insurers, added that the decision could also spur Blue Shield to convert to a for-profit entity, “which if followed by others, could in turn drive further industry consolidation.”
A number of not-for-profit Blues insurers converted to for-profit status in the 1990s, including the plans now under the Anthem umbrella. They generally were required to place their assets in charitable foundations as part of their conversions.