What Blue Shield of California’s Tax Exemption Means for Providers

News recently broke that after a lengthy audit of Blue Shield of California, the state’s Franchise Tax Board stripped California’s third largest insurer of its tax-exempt status, ordering the company to file retroactive tax returns from 2013, potentially costing Blue Cross tens of millions of dollars annually.

So, why was Big Blue’s tax exemption status revoked? Although no official reports have been released, there is one rather obvious $4.2 billion dollar-sized issue that could be the likely explanation.

Despite its nonprofit status, Blue Shield has long been accused of failing to play by the same rules as its nonprofit brethren. Blue Shield is expected to work for the public good in exchange for its tax-exempt status from the state. However, the organization holds a reported $4.2 billion in financial reserves. That’s not only well above what’s required by regulators, it’s also four times larger than what its national trade organization, Blue Cross and Blue Shield Association, requires members to hold in surplus. When compared to the $325 million Blue Shield of California has contributed to its charitable foundation during the last decade, it’s not hard to understand why many have long called for the organization’s tax exemption to be yanked.

For providers, this news has potentially serious repercussions.

At the top of the list: does the loss of its tax-exempt status—and the tens of millions per year it will cost—mean Blue Shield will push even more aggressively for lower reimbursement rates to make up for lost dollars?

We will have to wait and see, but it’s hard to imagine they wouldn’t. In recent years, we have witnessed fairly aggressive negotiating positions from payors in California. Now with the obligation to pay millions in taxes and premiums already similar to its for-profit competitors, the target of Blue Shield’s effort to replace those dollars could be its network of healthcare providers.

March 26, 2015
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