Blue Shield faces more heat over nonprofit status, $1.2-billion deal

Blue Shield of California is seeking state approval for its $1.2-billion purchase of Care1st, a Medicaid insurer based in Monterey Park. Above, Blue Shied's San Francisco headquarters.

Blue Shield of California is seeking state approval for its $1.2-billion purchase of Care1st, a Medicaid insurer based in Monterey Park. Above, Blue Shied’s San Francisco headquarters.

(Eric Risberg / Associated Press)

Health insurance giant Blue Shield of California is facing more questions over its loss of tax-exempt status as it tries to win state approval of a $1.2-billion acquisition.

A former Blue Shield executive is accusing the San Francisco insurer of giving contradictory answers to state officials about its corporate structure. And consumer advocates are calling on Blue Shield to disclose details of a state audit that examined the company’s taxpayer subsidy.

These issues are likely to dominate a hearing Monday in Sacramento held by the California Department of Managed Health Care.


Regulators will hear from Blue Shield and the public about the company’s plans to spend about a quarter of its $4.2 billion in financial reserves to acquire Care1st, a Medicaid insurer based in Monterey Park.

Blue Shield Chief Executive Paul Markovich will discuss the merits of the deal and take on his company’s critics at the hearing.

Scrutiny of the insurer intensified in March when The Times reported that the California Franchise Tax Board had quietly revoked Blue Shield’s tax-exempt status in August 2014 after a lengthy audit. Blue Shield had held the tax break since it was founded in 1939.

To the frustration of Blue Shield’s critics, the findings of the audit remain secret — even as the insurer is protesting the tax ruling. The company said it plans to remain a nonprofit regardless of the outcome.

Blue Shield already pays federal income taxes.

The tax board’s decision and the big acquisition have prompted debate about whether Blue Shield is serving the public interest as a nonprofit health plan. Many consumers complain about Blue Shield’s repeated rate hikes while it holds billions in surplus.

Blue Shield is the state’s third-largest health insurer, with about 3.4 million customers and $13.6 billion in revenue last year.


In letters to regulators in advance of Monday’s hearing, Blue Shield has emphasized that the company isn’t set up as a charitable organization, but rather as a nonprofit mutual benefit corporation that serves its members or policyholders.

Several consumer groups disagree, saying Blue Shield holds significant assets that are subject to “charitable trust obligations” and a higher level of regulatory scrutiny when they’re earmarked for a big acquisition.

In a letter to regulators, Blue Shield’s general counsel, Seth Jacobs, likened Blue Shield to other mutual benefit organizations such as homeowner associations, the Academy of Motion Picture Arts and Sciences — host of the Oscars — and the Olympic Club in San Francisco.

“Not every nonprofit corporation is a charity,” Jacobs wrote. “Mutual benefits are typically created for the benefit of the corporation’s members.”

If Blue Shield were ever dissolved, its assets as a mutual benefit corporation would go to its “beneficiary members,” according to the company’s bylaws.

Yet Blue Shield said its enrollees, or members, have no voting rights under those bylaws. The company doesn’t hold annual meetings or disclose full details of its executive compensation.


Michael Johnson, a former Blue Shield executive turned company critic, said the insurer told a different story to the tax board about its obligations to members. He said Blue Shield told tax officials it could not distribute assets to private people because it was legally prohibited from doing so.

He said Blue Shield made that case in hopes of keeping its tax-exempt status.

The insurer is “telling tax authorities one thing and health plan regulators another,” Johnson said. “With Blue Shield sitting on billions in nonprofit assets, money that belongs to the community, regulators need to force them to start acting like a real nonprofit.”

Blue Shield disputes Johnson’s allegations and said it has consistently told state officials that monies would be distributed to members upon dissolution. “That’s what we’ve told everyone, consistently, because it’s true,” said company spokesman Steve Shivinsky.

The Franchise Tax Board has denied public-records requests on Blue Shield from The Times and other organizations, citing the confidentiality of taxpayer issues.

Shivinsky defended the Care1st deal and said the acquisition addresses a long-standing complaint that Blue Shield hasn’t participated in Medi-Cal, the state’s insurance program for the poor.

“Our strategic decision was to purchase Care1st, and we believe that is in the best interests of Californians and our members,” Shivinsky said.


Consumer Watchdog, a Santa Monica advocacy group, said Blue Shield doesn’t act any differently from its for-profit rivals.

“This Care1st deal is just another money-making scheme by Blue Shield,” said Jerry Flanagan, staff attorney at Consumer Watchdog. “They are just pretending to have the community interest in mind.”

Twitter: @chadterhune