Blue Shield should give the public what it’s due

Word that Blue Shield of California was stripped of state tax exemption last August should prompt tough questioning from policymakers about whether the public is getting its due from Blue Shield.

What’s at issue here goes well beyond Blue Shield’s state tax liabilities. If the revocation, which the insurer is challenging, is upheld, Blue Shield could pay about $40 million in taxes annually.

Far more important would be what happens to the approximately $10 billion in assets Blue Shield is holding. Should they remain with Blue Shield or be given back to the community?

Some background may be helpful. For 12 years, I worked at Blue Shield as a manager and then director of public policy. I resigned last month after concerns I raised that Blue Shield was neglecting its duties to the public were dismissed by Chief Executive Officer Paul Markovich.             

Blue Shield of California is independent of other Blue Cross-Blue Shield companies in other states, and from Anthem Blue Cross, which operates in California.

Blue Shield of California is incorporated as a nonprofit social welfare organization. As such, it is owned by the public and has been exempt from California’s corporation tax for more than 70 years.

In exchange for the tax exemption, Blue Shield is obligated to serve the public's interests—exclusively. That’s news to most people because of the way Blue Shield has operated: amassing more than $4 billion in profits, paying multi-million dollar executive salaries, and charging rates just as high as for-profits.

By acting more like a for-profit insurer, Blue Shield shortchanges the public of the social welfare benefits taxpayers have paid it to provide—presumably, why examiners at the Franchise Tax Board moved to revoke its tax exemption.

However, just making Blue Shield pay taxes, including back taxes, would not make the public whole. For that to happen, Blue Shield’s billions of dollars in assets, which would continue to belong to the community regardless of Blue Shield’s tax status, would need to be put to work for the benefit of the public.

One way to do that would be for Blue Shield, like other nonprofit insurers before it, to be sold to private investors, with the proceeds going to the public to fund healthcare safety net programs.

It’s impossible to know in advance how much this would generate, but considering Blue Shield’s assets, which include $4.2 billion in retained profits and a 3.4 million-member customer base, $10 billion is a reasonable estimate.

A public endowment of that size would generate $500 million in additional funding for public healthcare programs every year.

By way of example, consider the predecessor to Anthem Blue Cross.  In the mid-1990s, Blue Cross of California was converted from a nonprofit to an investor-owned company, which eventually merged with Anthem.

In the process, $3 billion was turned over to start funding the California Endowment and California Healthcare Foundation, which sponsor a huge array of health-oriented public benefit projects.

The alternative to the approach described above, under which the public would effectively cash out its $10 billion investment in Blue Shield, would be for the insurer to retain its official nonprofit status.

Blue Shield has said this is what it plans to do regardless of what happens with its tax exemption. Remaining a nonprofit would mean that Blue Shield would keep the $10 billion in community assets under its control.

This would serve the public interest, Blue Shield’s supposed mission, only if the nonprofit insurer delivered community benefits equal in value to the roughly $500 million a year that would be generated if the community investment in Blue Shield were pulled out.

Could Blue Shield be trusted to do that? Not based on its record.

Blue Shield’s rates, services and practices are so indistinguishable from those of for-profit companies that people routinely confuse Blue Shield with its biggest for-profit competitor, Anthem Blue Cross.

The only concrete community benefit Blue Shield currently delivers is about $35 million a year in charitable contributions—a return of just one-third of one percent on the community’s $10 billion investment in Blue Shield.

If Blue Shield declines to give up its official nonprofit status and retains the $10 billion in community assets it now holds, the public will have to rely on it to put those assets to work for community benefit.

Given its performance to date, Blue Shield is unlikely to deliver more than a small fraction of the benefits its owes the community without a specific and detailed mandate to do good for the public. That’s a void the legislature will need to fill.