Blue Shield of California is in the position of trying to keep its state tax exemption, while also defending its public image and defining its future mission to customers.
2015 has been a rocky year for nonprofit Blue Shield of California, the third largest health insurer in country's largest state market.
First there was a network dispute with Sutter Health, one of Northern California's largest and most prestigious health systems. That ended with a two-year resolution preserving in-network access but also a lingering animus, as well as a renewed effort by Sutter to grow its own health plan in greater Sacramento and wealthy Sonoma County.
In March came news about the California Franchise Tax Board revoking Blue Shield's tax-exempt status in the wake of an audit, and ordering back taxes to be paid for 2014 and 2013. Almost simultaneously, now-former public affairs director Michael Johnson quit in protest and launched Make It Right Blue Shield, a campaign to convert the insurer into a for-profit company and turn over some of its $4 billion capital reserve to the public good.
Later in the spring, a legal battle surfaced with a former chief technology officer, Aaron Kaufman, who was accused of making $100,000 in improper corporate credit card charges and whose girlfriend, actress Tara Reid, allegedly acted inappropriately at a company party. ("Word of the behavior at the bowling alley event spread quickly at Blue Shield and caused a great disturbance within the company," Blue Shield's lawsuit states.) Kaufman was seeking a $450,000 bonus and said he was fired for trying to get a better vendor for a data systems replacement project.
All in all, that's a fair amount of negative publicity at a time when Blue Shield is trying to secure a place in the new healthcare economy, vying against Kaiser Permanente, for-profit Anthem Blue Cross, national insurers and smaller regional health plans.
Nonprofit distinction
Founded by the California Medical Association in 1939, San Francisco-based Blue Shield passed on the for-profit conversation path taken in 1996 by SoCal-headquartered Anthem Blue Cross, and in the following decade had a reputation as a forward-thinking company.
In 2002, Blue Shield was the first California insurer to endorse statewide universal coverage, embracing the "shared responsibilities" policy ideas that very much resemble the Affordable Care Act's major provisions. In 2010, the insurer made a "2 percent pledge" to limit annual net income to 2 percent of revenue, turning the rest (about $30 to $40 million annually) over to its community foundation.
Michael Johnson started working on public policy issues for Blue Shield in 2003, eventually becoming public affairs director. "One of the things that attracted me to Blue Shield in the first place was that it was a nonprofit and back in 2003 had a fairly progressive attitude about healthcare reform," Johnson said. "I spent a good amount of time working on health reform, and Blue Shield to its credit has been relatively supportive of healthcare reform."
Despite that, Johnson grew "more and more frustrated with what seemed to me on the business side not much distinction between what Blue Shield did and what its for-profit competitors did. It wasn't doing more to benefit the public." As the state was auditing Blue Shield's tax exemption, Johnson concluded that "they act like a regular insurance company: big profits, generous salaries, and high rates."
Much like other insurers through the 2000s, Blue Shield consistently raised premiums (pointing to growing healthcare expenses, including hospitalization costs). In 2011, amid steep premium increases, retiring CEO Bruce Bodaken was paid $4.2 million, and the following year three top executives each earned more than $1 million. Last year, Blue Shield spent at least $2.5 million on an unknown number of luxury box seats at Levi's Stadium, and spent $10 million to help defeat a premium regulation ballot measure.
Blue Shield also participated in one of the most notorious insurance practices that typified the call for insurance reform during the Affordable Care Act's creation--rescission, retroactively cancelling policies.
In 2008, Blue Shield paid $2 million in penalties and reinstated coverage for 450 customers whose policies were wrongfully terminated. (Anthem paid out $10 million and reinstated coverage for 1,770 in that settlement, with the CA Department of Managed Health Care.) In 2011, Blue Shield again resolved similar allegations of unfairly dropping members, this time in a $2 million settlement with the City of Los Angeles over 1,000 rescission cases.
And, Johnson added, Blue Shield has sat out California's Medicaid managed care program (although it plans to enter that now) and did not sell subsidized exchange plans in every part of the state, which left some ratings areas with limited choices.
Given all of that, Johnson agreed with the California Tax Franchise Board that the insurer could afford to pay an estimated $40 million in state taxes. It also left Johnson with the belief that Blue Shield should go the way of Anthem Blue Cross and become a for-profit company, while turning over a lot of its assets to the public.
"We may have come to a point where the usefulness of a nonprofit like Blue Shield has been outlived," Johnson said. "When they were first launched, health insurance didn't exist; it enabled people to see doctors and go to hospitals. Now that we have for-profit companies providing that service, nonprofits should either find other ways to be able to serve the public and provide access, or to make the decision: 'We've served our purpose and it's time to disband and the assets can go back to the public.'"
In Johnson's view, Blue Shield could become a for-profit on its own and be a successful insurer or it could be acquired by another insurer. Being taken over by Anthem would "concentrate the market" and wouldn't make sense, but regardless of the ultimate owner, the conversion should follow Anthem's model, he argues.
In 1993, Anthem's for-profit conversion was approved by state regulators without any charitable asset distribution. Then the Department of Insurance stepped in to seek some contributions. Blue Cross executives proposed $100 million, which was rejected. The company ended up agreeing to transfer the equivalent of its total assets, some $3.2 billion, in cash and equity interest to fund the California Endowment and the California HealthCare Foundation. Based on its revenue, Blue Shield's assets could be valued at north of $10 billion.
"Anthem had $3 billion in assets and set up foundations valued at $3 billion, and they went to fund the California Healthcare Foundation and California Endowment," Johnson said. "The public gets the benefits of all of the products and services of Anthem, plus the work of the California Endowment and California HealthCare Foundation, which to me adds up to a better deal." While Anthem has had its own share of scrutiny for contract rescission, premium increases, executive compensation and more, the company "has served MediCal (Medicaid) for years, and done more to serve public health programs, including the high risk pool," Johnson argues.
For its part, Blue Shield is challenging the tax exemption decision, but planning to say a nonprofit either way. "There's no question or debate about that," said Steve Shivinsky, vice president of corporate communications.
About Johnson's idea that Blue Shield should convert into for-profit company, "the premise is outrageous," Shivinsky adds. "Anthem is a publicly-traded company that has as its primary purposes to provide dividends to shareholders. Blue Shield is not motivated by a mission to serve shareholders, but to provide Californians with affordable healthcare."
Blue Shield intends to remain a nonprofit either way pending its appeal of California Franchise Tax Board. Other Blue-licensed insurers might have different ideas if they're confronted with the possibility of a new state tax--likewise other nonprofit health insurers and health systems, in California and elsewhere.
The group Consumer Watchdog is pushing the California Franchise Tax Board to release records related to its decision, so that other states can consider making changes and so other tax-exempt nonprofits can be measured by similar standards.
"There are many reasons we can point to but we're more interested in seeing which reasons the state took into account when it made this decision," Jerry Flanagan, lead staff attorney for Consumer Watchdog, told California Healthline. "If we can see the records and how they were interpreted we can look at some of the other huge tax-exempt corporations like Kaiser and Dignity and Sutter and see if they're measuring up."