California approves Blue Shield-Care1st merger despite consumer opposition

The state of California has approved Blue Shield of California's $1.2 billion deal to buy Care1st Health Plan, a Los Angeles-based managed-care company. The move allows the insurer to work with Medi-Cal and Medicaid beneficiaries but also means a permanent loss of its state tax-exempt status.

Blue Shield of California, which has more than $13 billion in annual revenue and 4 million members, will remain not-for-profit. Care1st Health Plan has more than 500,000 members and will become a not-for-profit after closing.

To gain state approval, Blue Shield had to agree to put $200 million toward increasing healthcare transparency and accessibility, as well as support consumer-assistance programs. It also agreed to improve its quality-of-care performance and improve the Care1st network of contracted specialty providers.

Consumer group Health Access California issued a statement calling on the California Department of Managed Health Care to make sure Blue Shield sticks to commitments in the deal.

The group argues that Blue Shield should be required to improve quality more significantly than the agreement describes, and should have 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, said Anthony Wright of Health Access California.

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 Director Shelley Rouillard.

The State of California Franchise Tax Board last year revoked Blue Shield's state tax-exempt status. Blue Shield initially appealed that ruling, but now it has agreed to continue to be taxable at the state level.

Jerry Allen, a tax partner at Bricker & Eckler and former attorney with the Internal Revenue Service, said that provision is unusual.

But, he added, it's in line with federal law. The IRS and Congress decided years ago that Blues organizations operated too much like commercial health insurers to continue to be federally tax-exempt.

Blue Shield may have decided to agree to that term in the deal because it had more to gain financially by acquiring Care1st than it had to lose by being taxable.

Allen said states are taking a closer look at tax-exempt organizations and their merits.

Attempts to reach attorneys for Blue Shield for further comment were unsuccessful.