After mulling over Blue Shield of California’s $4.2-billion financial reserve and its business practices, the state Franchise Tax Board revoked the tax-exempt status of the not-for-profit health insurance behemoth. 

But the board decided last August, when it made the ruling, that there was no compelling reason to tell the public about it, and Blue Shield, which contests the decision, was in no hurry to disclose it—just months before the beginning of open enrollment.

Consumer Watchdog President Jamie Court was not amused. He told the Los Angeles Times, which broke the story, “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. . . . There should be legislative oversight hearings on why this was kept secret.”

The tax board didn’t completely hide what it had done; Blue Shield was quietly added to a list of organizations that lost their exemption. It was right there in plain sight, among hundreds of other organizations in a 1,386-page document, according to the Times.

Blue Shield, which had $13.6 billion in revenue in 2014, has held tax-exempt status since its founding in 1939. The board refused to disclose the reasons for its decision, but critics point to policies that led to a financial reserve about four times larger than is required.

They say the insurer acts like a for-profit company, but instead of paying taxes it contributes a few million dollars to charity. Rates are high, executive pay is extravagant (a former chief executive made $4.6 million a year) and services are nothing special.

In 2011, Blue Shield announced plans to hike premiums 59%. That didn’t happened, but the insurer did incur the wrath of a beleaguered public still reeling from the Great Recession and prior to enactment of the Affordable Care Act (Obamacare). Last August, the San Francisco Chronicle wrote about the San Francisco-based company’s $2.5 million luxury box at Levi’s Stadium, home of the 49ers football team.  

Some critics want legislative hearings, some loopholes closed and an audit. Others want the $10-billion company converted to for-profit, with state taxpayers picking up billions of dollars in the process.

That’s what happened in 1997 when Blue Cross lost its tax-exempt status and eventually became part of Anthem. During the transition, it shed $3 billion, which was used to establish non-profit organizations that promote health care among underserved populations and accountability in the medical industry.

–Ken Broder

To Learn More:

Why Did It Take 7 Months to Learn Blue Shield Lost Tax-Exempt Status? (by Chad Terhune, Los Angeles Times)

California Tax Board Revokes Health Insurer Blue Shield’s Tax-Exempt Status (by Tracy Seipel, Bay Area News Group)

California “Blues”: Insurer Stripped of Tax Exemption (by Dan Mangan, CNBC)

Tax Agency to Blue Shield: You Owe Us Big Time (by Chris Rauber, San Francisco Business Times)

With Billions in the Bank, Blue Shield of California Loses Its State Tax-Exempt Status (by Chad Terhune, Los Angeles Times)

Insurance Commissioner Rips Blue Shield For Alleged Tax Dodge (by Chris Rauber, San Francisco Business Times)