Demystifying Medicine One Month at a Time

Blue Shield (CA) Gets Stripped — and Here’s Why You Should Care

GlassHospital & Co. were in California last week, where a huge story was reported by Chad Terhune in the LA Times.

The story was picked up nationally, but given the fact that it’s about a large non-profit health insurer and a state bureaucracy, you could easily have let your eyes scan elsewhere. Or glaze over.

But I’m here to tell you why this is both fascinating and really important:

1369238178_BlueShield4WebBlue Shield, the third largest health insurer in California was stripped of its tax-exempt status. For a non-profit, that smarts. And it’s nearly unprecedented.

Non-profit institutions like hospitals, schools, charities, and religious organizations do not pay taxes, because their “business models” are about public service and/or community benefit; not about pure profit. Nevertheless, non-profits do need their revenues to exceed their expenses — typically to get re-invested in their missions, rather than, say, as dividends to shareholders — else they risk not being able to continue in business.

With more and more non-profits being urged by the public and their executives to be run “like businesses” — efficient, cost-effective, strategic — it’s no wonder that many non-profits now operate essentially like their for-profit counterparts.

Here’s the rub: when that happens, attention can drift from the mission. For a hospital, it can mean focusing more on competition and market share than on serving the public. Same for a health insurer. Blue Shield has amassed a financial reserve of $4 billion, more than four times what its parent organization requires.

What’s a non-profit doing hoarding that kind of cash?

An obscure entity called the California Franchise Tax Board issued the ruling stripping Blue Shield of its tax exempt status last August (why it took so long to become public is another story). The Tax Board determined that the business practices of Blue Shield are not consistent with the public purposes of a ‘true’ not-for-profit entity [my phrasing].

Blue Shield is appealing the decision. Apparently, this all occurred due to a whistleblower, who went to Blue Shield’s management to make his case that the company needed to act more in the public interest. Sadly, his ideas were dismissed.

Taking away a non-profit’s tax-exempt status is a harsh punishment, and very rarely implemented. Exactly five years ago, I blogged about an Illinois hospital that had its tax-exempt status stripped. That gives you some sense of the rarity of such an action. What could this decision portend for other revenue-starved states?


  1. JZ

    Fascinating — so does that mean that Blue Shield is not a non-profit as far as California is concerned, but to the federal IRS it still is?

  2. glasshospital

    Interestingly, I don’t think Blue Shield is non-profit in the eyes of the federal government either. Blue Shield (as well as Blue Cross, before it changed status to become part of Anthem) started paying federal taxes in the late 1980s:

    “Blue Shield is already paying federal taxes. Congress passed a tax reform law in 1986 that essentially stripped Blue Cross and Blue Shield of their federal tax-exempt status, after rival insurers complained. The two Blues unsuccessfully argued against the move, saying they deserved the tax-exempt status because of their efforts involving charitable, community-based health care.”

    The above paragraph comes from the NPR coverage of the story:

  3. Jeff

    I can’t help but feel that they’re just really unlucky. I don’t have personal experience with these particular sorts of cases, but from what I’ve studied/seen of the industry, I seriously question whether most NFPs would retain their labels under the same scrutiny Blue Shield experienced here.

  4. Frances Dalton, MD

    As a California physician, I am fed up with the Blues. They are greedy and strangling physicians by reducing income or scrutinizing billing practices and dictating billing coding.

    The Blues plans under the Affordable Care Act in my county pay 30 % less than they do out side of the ACA plans offered by employers.

    They threaten to audit our charts before paying on claims which could give them any reason to delay payments.

    As one of the few remaining solo practitioners in the metropolitan Bay Area, it’s a squeeze.

    With multiple layers of paid administration, it’s hard to believe in their benevolence, but rather their goal as being financial gain.

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