Blue Cross Tax Status Criticized

Consumer advocates criticized the proposed sale of WellPoint Health Networks Inc. on Wednesday, saying its Blue Cross of California unit enjoyed a unique and unfair loophole that allowed it to pay lower taxes than rival health plans.

Indianapolis-based Anthem Inc. plans to buy WellPoint for about $17 billion, which would create the nation’s largest health insurance company.

Although the sale has been approved by shareholders and by regulators in 10 states, California Insurance Commissioner John Garamendi and Cindy Ehnes, director of the state Department of Managed Health Care, have yet to sign off.

“While legislators and patients grapple with the challenge to pay for public health care programs and skyrocketing insurance premiums, it is absurd that the state’s most profitable insurer is allowed to flout state tax laws,” the Foundation for Taxpayer and Consumer Rights said in a letter to Garamendi and Ehnes.

The group said the tax loophole cost the state about $48 million in taxes last year. It urged state regulators and lawmakers to remove the exemption.

“The accusations are without foundation and factual accuracy, and they leave out important facts,” said WellPoint spokesman Ken Ferber.

In 2003, Blue Cross of California and another Blue Cross unit together paid $89.6 million in state income and premium taxes, he said. The company believes that is a greater tax liability than any other health insurer operating in California.

“They are saying we’re not paying a required premium tax,” Ferber said. “But under the law it is not required.... There is no violation of tax laws.”

Blue Cross was established in the late 1930s as a nonprofit, public-benefit institution and was exempted from paying taxes on health premiums that the state imposes on other insurers.

Then a decade ago Blue Cross was sold to WellPoint, a for-profit corporation, but its tax status stayed the same.

The Department of Managed Health Care said legislation in the 1990s brought Blue Cross under the agency’s jurisdiction and exempted it from the premium tax that most for-profit insurers pay. The department primarily regulates HMOs.

Most other for-profit, full-service PPOs fall under the jurisdiction of the Department of Insurance and pay the stiffer gross premium tax, according to regulators, lobbyists and lawmakers.