Blue Shield of California Loses Tax-Exempt Status

Blue Shield of California has a financial reserve of $4.2 billion — four times larger than what its national trade organization requires.
Matthew HellerMarch 19, 2015

California tax authorities have stripped Blue Shield of California of its exemption from state income taxes amid criticism that it has not lived up to its responsibilities as a nonprofit company.

ThinkstockPhotos-464991801The Los Angeles Times on Wednesday reported the California Franchise Tax Board’s move, saying the state had ordered Blue Shield to file returns dating back to 2013, “potentially putting it on the hook for tens of millions of dollars in state taxes each year.”

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A spokeswoman for the board declined to comment on the revocation of Blue Shield’s tax-exempt status, but the Times noted that, “The highly unusual action comes after a lengthy state audit that looked at the justification for Blue Shield’s taxpayer subsidy.”

Blue Shield, California’s third-largest insurer, is protesting the decision. “Blue Shield as a company and management team firmly believes it is fulfilling its not-for-profit mission and commitment to the community,” a company spokesman said.

But as NPR reports, Blue Shield’s director of public policy, Michael Johnson, resigned last week after raising concerns internally that the company was not doing enough for the public good.

“For over 70 years, Blue Shield has been a tax exempt entity, subsidized by taxpayers in order to provide benefits to the public. But it’s demonstrated that it’s either unwilling or incapable of serving the public good,” he said in announcing a campaign to make the company give back as much as $10 billion in profits it has earned “while claiming a tax exemption to do good for the public.”

According to NPR, Blue Shield has a financial reserve of $4.2 billion — four times larger than what the national trade organization, Blue Cross and Blue Shield Association, requires members to hold in surplus to pay out member claims. But over the past decade, it has contributed only about $325 million to its charitable foundation, while charging premiums similar to those of for-profit competitors.

“Blue Shield’s surplus is significantly more than needed to protect their solvency,” Dena Mendelsohn, a health policy analyst at Consumers Union in San Francisco, told The Times.