BUSINESS

Why did it take 7 months to learn Blue Shield lost tax-exempt status?

California's Franchise Tax Board revoked Blue Shield's tax-exempt status in August--but didn't publicize it

Health insurance giant Blue Shield of California and state tax authorities both came under fire for not disclosing seven months ago a landmark decision taking away the insurer's tax-exempt status, which had been in place since 1939.

The Times first reported Wednesday that the California Franchise Tax Board had quietly revoked Blue Shield's tax-exempt status in August after a lengthy audit of the nonprofit health plan.

At that time, the state agency merely added the company's legal name, California Physicians Service, to a 1,363-page document on its website listing hundreds of organizations that lost their exemption.

Blue Shield is protesting the tax board decision, and a company spokesman said the change wasn't announced in August because "it's not something we felt had to be discussed in public. We are working with the tax board to resolve what we consider a disagreement over their decision."

All that came about as the San Francisco insurer was already facing criticism for $4 billion in financial reserves, ever-rising premiums and multimillion-dollar executive salaries.

California Insurance Commissioner Dave Jones on Wednesday applauded the tax board's move as further proof that "Blue Shield charges excessive rates and acts like a for-profit insurer."

Now consumer groups are asking for legislative hearings into the tax board's handling of the Blue Shield matter, and the chairman of the Senate Health Committee said he wants to examine the state tax audit in detail.

Jamie Court, president of Santa Monica-based Consumer Watchdog, said, "There should be legislative oversight hearings on why this was kept secret.

"One of the biggest health insurers loses its tax exemption while it's marketing itself aggressively as a not-for-profit. The public deserved to know this before open enrollment" in the state's Obamacare exchange and when employees were choosing coverage at work, Court said.

He also questioned why tax authorities have only required Blue Shield to file tax returns back to 2013. His group suggested that the state should go back eight years for back taxes.

It's estimated Blue Shield may owe tens of millions of dollars annually in state income taxes after losing its exemption. Blue Shield has paid federal taxes for years.

Denise Azimi, a spokeswoman for the tax board, said it updated its public list of revoked organizations with Blue Shield's legal name and public announcements aren't typically made on these matters.

She said audits aren't available for public review, and the agency doesn't comment on reasons for a revocation because of the confidentiality of taxpayer issues.

State Sen. Ed Hernandez (D-West Covina), Senate Health Committee chairman, said he too wanted more answers from the franchise tax board and welcomes a debate over whether Blue Shield is meeting its obligations to taxpayers.

"Blue Shield enrollees and the public at large are entitled to a reasonable return on the investment the state has made by granting Blue Shield tax-exempt status," Hernandez said. "I'm looking forward to finding out what exactly the public got for our money."

The insurer continued to push back against the mounting criticism even as a campaign was launched by a former company insider.

Michael Johnson, former public policy director at Blue Shield, is trying to put pressure on Blue Shield's board through an online petition website, change.org. The petition calls for the company to convert to for-profit status and hand over billions of dollars in assets that could be used to improve the state's healthcare safety net.

"Blue Shield suddenly paying taxes doesn't mean the bigger problem is solved," said Johnson, who spent 12 years at the company. "The real issue for the public is what happens with the $10 billion in assets that Blue Shield represents."

Steve Shivinsky, a Blue Shield spokesman, said the company plans to remain a nonprofit despite the tax board ruling and has no desire to undergo a conversion.

"We will continue to fulfill our not-for-profit mission," he said. "Blue Shield believes it has demonstrated its commitment to the community."

Blue Shield cites its 2011 decision to cap profits at 2% of annual revenue, its contributions to its charitable foundation and its longtime support for health reform.

Jones, the state's insurance commissioner, also accused Blue Shield of evading a separate set of premium taxes through its use of a legal loophole. It's an issue that Jones has raised before and he's backing legislation that seeks to close the loophole for both Blue Shield and its for-profit rival, Anthem Inc.

"Blue Shield is dodging taxes other legitimate businesses and families pay," Jones said. "It is fundamentally unfair and corrosive to our system of tax collection."

Blue Shield said it operates within the law and pays all taxes that are due.

Glenn Melnick, a USC health-policy professor, said the developments at Blue Shield point to the need for greater accountability for giant organizations receiving government subsidies.

"I have never seen an investigation like that on Blue Shield," Melnick said. "Is this the beginning of a harder look at nonprofits in healthcare? In a lot of cases, nonprofit status is exploited."

chad.terhune@latimes.com

Twitter: @chadterhune

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