Facing scrutiny over executive compensation, reserves and premiums, California's third largest insurer is under pressure to justify its state tax exemption, and state finance authorities wants to start collecting.
The California Franchise Tax Board has revoked the tax-exempt status of Blue Shield of California following an audit last year, as the Los Angeles Times first reported. And a former public affairs director is mounting a campaign to pressure the not-for-profit insurer to convert into a taxpaying for-profit.
Blue Shield of California, the state's second largest nonprofit insurer and third largest by enrollment, has been exempt from state income taxes since it was founded by the California Medical Association in 1939, as the California Physicians Service.
Several months after the Franchise Tax Board's decision, Blue Shield's public affairs director Michael Johnson left, disillusioned with the company's trajectory in its mission. "Californians are being deprived of the benefits that taxpayers have paid Blue Shield to provide," he argues.
Under a campaign called Make It Right Blue Shield, Johnson is hoping to convince regulators, lawmakers and citizens to restructure the the $10 billion insurer. "Blue Shield's assets could be transferred to the public and the company operated instead with financial backing from investors," Johnson wrote.
Blue Shield is challenging the Franchise Tax Board's decision, and regardless of how the dispute ends up, "we will continue as a not-for-profit," communications manager Sean Barry.
While rival Anthem Blue Cross of California became a for-profit in 1996 and then formed the publicly-traded Anthem company, San Francisco-based Blue Shield has long pitched itself as a progressive company focused on its members and the state's healthcare system: "We don't answer to Wall Street. We don't need to generate returns to shareholders," the company says on its website.
"Blue Shield of California is a mission-driven not-for-profit health plan with a demonstrated commitment to the community," Barry said. "A longtime supporter of healthcare reform, we limit our net income to 2% of revenue and have contributed $325 million to our foundation's efforts to improve the health safety net and address domestic violence."
'They act like a regular insurance company'
Over the last two decades, Blue Shield has avoided some of the worst managed care horror stories that led to fines at its for-profit competitors--incidents of health plans cancelled upon diagnosis of life-threatening diseases or in the middle of a subscriber's cancer treatment.
But in recent years, Blue Shield has come under fire for a litany of decisions critics deem unbecoming of a not-for-profit: creating narrow provider networks, sitting out of the Medicaid program, increasing premiums, spending $10 million to defeat a premium regulation ballot initiatives, amassing $4 billion in capital reserves, sponsoring luxury seats at the Levi's football stadiums and paying top executives multi-million compensation.
In 2011, amid premium increases and the uncertainty of the Affordable Care Act, CEO Bruce Bodaken was paid $4.2 million, just before retiring. In 2012, the company paid its three top executives more than $1 million each, including CEO Paul Markovich in his first year on the job, as the LA Times reported. Blue Shield adopted the 2 percent profit margin cap in 2011, paying members and community groups more than $500 million with the surplus. In 2013, Blue Shield earned a 1.6 percent profit margin with net income of $171 million on $10.8 billion in premium revenue.
Despite that 2 percent pledge, the company's trajectory left Johnson, the public affairs director for 12 years, concluding that it should convert into a for-profit and pay taxes, which could be used to improve Medi-Cal, California's Medicaid program. "Blue Shield is a tax-exempt, nonprofit organization, but they act like a regular insurance company: big profits, generous salaries, and high rates," Johnson said on the Make It Right website. "Blue Shield is not supposed to be like other health insurance companies. Blue Shield belongs to the California public and is legally obligated to serve their interests--exclusively."
"I'd raised concerns internally that Blue Shield wasn't doing nearly enough to meet its duties to the public as a tax-exempt nonprofit, but senior management dismissed them," Johnson wrote in a blog post.
Johnson's Group is now running a petition drive to bring the matter to the Blue Shield board, which is chaired by the telecom executive Robert Lee, while the company fights the decision by the California Franchise Tax Board, which ordered taxes to be paid going back to 2013.
Meanwhile, in one area that has garnered criticism from advocates like Johnson, Consumers Union and Health Access CA, Blue Shield is planning to participate in the state's Medicaid program, which is surging in enrollment but also struggling with provider participation and low reimbursement. Blue Shield is in the midst of acquiring Care1st, a for-profit HMO with 320,000 Medi-Cal members in greater Los Angeles and San Diego.
"There are more than 11 million Californians in the Medi-Cal system today, and we can fulfill our not-for-profit access and affordability mission by serving this population," said Blue Shield Paul Markovich at the time. "Acquiring Care1st, a growing, values-based company with deep Medicaid experience, is the ideal way for us to not only enter a new market, but also to help transform it together."
Another Blue restructuring, Independence "We're redesigning a 75-year-old structure that reflects our past, not our present or our future."
Healthy mutual margin After transitioning to a tax-paying, mutual company, Michigan's largest health insurer is in pretty good financial health.