Regulator approval of Blue Shield bid to privatize nonprofit assets could cost public $10 billion

Photo by  Steve Rhodes .

Photo by Steve Rhodes.

California’s health plan regulator ruled last month, as reported by the Los Angeles Times, that nonprofit insurer Blue Shield of California has no charitable trust obligation. The ruling means that Blue Shield is free to operate with no regard for the good of the community and if the health plan were ever acquired, the public would be entitled to none of the billions of dollars the sale would net.

The decision was a bad call, and if not reversed, will cost the public dearly.

The Department of Managed Health Care, or DMHC, made the determination in connection with its review and approval of Blue Shield’s $1.2 billion acquisition of Care1st Health Plan. Had the agency found a charitable trust obligation exists, a more rigorous review of the deal would have been required.

The biggest consequence of the ruling, however, is what it would mean for the public in the likely event that Blue Shield, in response to increasing consolidation in the health insurance industry, would someday merge with a bigger corporate entity.

Public stands to lose billions

To understand what’s at stake, it helps to know the story of Blue Cross of California (which is and always has been separate from Blue Shield). In the mid-1990s, Blue Cross, then a nonprofit insurer, was acquired by WellPoint, now known as Anthem.

Since the transaction meant that a nonprofit obligated to operate for community benefit would be converted to a for-profit beholden to shareholders, the state required that $3 billion, the total value of Blue Cross, be turned over for the creation of two community benefit foundations—The California Endowment and California HealthCare Foundation.  

State law mandates that whenever a nonprofit health plan is acquired by a for-profit entity an amount equal to the total worth of the nonprofit be set aside and preserved for the benefit of the community. But the law applies only “to the extent these plans have held or currently hold assets subject to a charitable trust obligation, as determined by the director [of the DMHC].”

By ruling that Blue Shield doesn’t have a charitable trust obligation, Shelley Rouillard, the department's director, has effectively declared that Blue Shield isn’t subject to the law. Based on the $1.2 billion price for Care1st, a reasonable estimate of Blue Shield's value—and the amount that would be lost to the community—is $10 billion.

No justification

The rationale for Rouillard’s ruling is apparently a state secret. Her agency has volunteered no explanation, and in response to my Public Records Act request, refused to turn over any documents shedding light on how she came to her decision. The only information the DMHC has released regarding Blue Shield’s charitable trust obligation is the health plan’s argument that it doesn’t have one.

In its filings with the agency Blue Shield claimed that it is a fundamentally different kind of nonprofit than Blue Cross had been. Blue Shield is akin, its general counsel argued, to the Olympic Club, a San Francisco social club, and the Academy of Motion Picture Arts and Sciences, which puts on the Oscars. Like those organizations, Blue Shield, he asserted, has no charitable trust obligation because it is incorporated as a nonprofit “mutual benefit” corporation, and it “operates only for the benefit of its policyholders and not the public at large.”

But that contradicts what Blue Shield told tax authorities who were auditing its tax exemption and how it has long portrayed itself to the public. In defense of its tax exemption, which requires that it operate for the “promotion of social welfare,” Blue Shield depicted itself as working for the benefit of all Californians. On social media, such as Twitter and Facebook, Blue Shield describes itself as “Not for Profit. For community.”

Blue Shield’s assertion to the DMHC that its nonprofit mission is limited to benefiting only its enrollees contradicts even how its most prominent board member, former defense secretary and CIA chief Leon Panetta, has described the health plan. When he signed on as a director, Panetta said, “I have chosen to serve on the board of Blue Shield because it is a not-for-profit health plan . . . Blue Shield is focused on the long-term welfare of the entire community, not just its members.”

Scheme hatched 20 years ago

Blue Shield’s ploy to redefine itself in a way that would gain it exemption from the law preserving nonprofit assets for community benefit began as soon as the legislature took up the measure. The legislation, SB 445, was introduced on February 16, 1995. Exactly one month later, Blue Shield’s board voted to reincorporate as a nonprofit mutual benefit corporation. At a committee hearing a month after that, Blue Shield lobbied for an amendment to the bill exempting mutual benefit corporations.

Fortunately, the bill’s author resisted and instead stipulated in the measure that it would apply to mutual benefit corporations to the extent that they hold assets subject to a charitable trust obligation.

But Blue Shield has now gotten its way. By obtaining last month’s ruling from the DMHC, Blue Shield is poised to walk off with billions of dollars in community assets if—indeed, when—it is acquired. That cannot be allowed to happen. If the DMHC won’t reconsider this unjustified ruling in a fully transparent process, the legislature should step in to prevent Blue Shield from subverting the vital community protection it enacted 20 years ago.