The state of California approved Blue Shield of California's acquisition of a Los Angeles managed-care company on Thursday in a $1.2 billion deal that cost the combined entity its state tax-exempt status.
The news that Blue Shield may complete its acquisition of Care1st Health Plan follows a lengthy regulatory approval process where consumer groups such as Health Access California vigorously opposed the plan, fearing it would lead to large rate increases.
In the wake of the approval, Health Access issued a statement calling on the California Department of Managed Health Care to remain vigilant to ensure Blue Shield sticks to the commitments, dubbed undertakings by regulators, that were included in the deal.
"The undertakings are underwhelming in preventing unreasonable rate increases and other patient protections that we sought,” said Anthony Wright, a spokesman for Health Access. "Blue Shield should also have been required to improve quality by more than what's outlined in the agreement and should have also had to agree to put more of its money toward charitable endeavors considering it made much of that money as a result of its previous state tax exemption."
The insurer said the deal will benefit all Californians. "This acquisition will expand our reach to serve more Californians, allow us to systematically improve the quality and affordability of their care and keep Care1st jobs and revenue in California,” said Paul Markovich, president and CEO of Blue Shield of California.
Blue Shield, which has more than $13 billion in annual revenue and 4 million members, will remain a not-for-profit. Care1st Health Plan has more than 500,000 members. Blue Shield will convert Care1st to a non-for-profit after closing.
Both those designations will mean little at the state level. The California Franchise Tax Board decided last year to revoke Blue Shield's exemption from state taxes. While Blue Shield appealed that ruling, it has now agreed to be permanently taxable.
To assuage the regulators, Blue Shield committed to improving the state's healthcare delivery system, benefit consumers and improve access in the Medi-Cal program. The California Department of Managed Health Care performed an “exhaustive review of all aspects of the proposed transaction, performed complex legal analyses, conferred with external experts and considered all public comments,” before approving the deal, according to a statement from department director Shelley Rouillard.
Blue Shield agreed to put $200 million toward increasing transparency and accessibility in healthcare and supporting consumer assistance programs. It also agreed to improve its quality of care performance and improve the Care1st network of contracted specialty providers.
Blue Shield, already the third-largest health insurer in California by market share, had faced criticism for its executive pay and higher-than-necessary reserve to pay future claims. Attempts to reach Blue Shield for further comment were unsuccessful Friday.
Having a provision like that attached to such a deal is fairly unusual, said Jerry Allen, a tax partner at Bricker and Eckler and former attorney with the IRS.
But he said the state's decision to make Blue Shield taxable is in line with the way federal law regards most Blues organizations. Blue Shield of California is not tax-exempt at the federal level, as most similar organizations are not, Allen said. The IRS and Congress decided years ago that the Blues organizations were operating too much like commercial health insurers to continue to be federally tax exempt.
Blue Shield may have decided to the terms of the deal because it had more to gain financially by acquiring Care1st than it had to lose by being taxable. It also may not have expected to win its appeal of the California Franchise Tax Board's decision.
Allen said it's part of a trend of states taking a closer look at tax-exempt organizations. “States are becoming more active at taking a look at tax exempt organizations and whether or not they should be able to qualify,” Allen said.
Though technically still a not-for-profit, the agreement allows Blue Shield to exempt its assets from charitable trust requirements.
Consumer groups took particular exception to that part of the deal. "We are concerned about BlueShield's rejection of their charitable obligation as a nonprofit, and that so much of their charitable contributions in these undertakings are under their discretion and control," Health Access California said in a statement.
Correction Monday, October 12:
An earlier version of this story incorrectly referred to Blue Cross as a charity.