California Blue Shield could be out tens of millions of dollars as it loses its state tax exemption. NPR reports that the California Franchise Tax Board stripped the insurer’s tax exemption back in August, but the information hasn’t become public until now. The federal government took away Blue Shield’s federal tax exemption in 1986, but California is just now following suit on the state level.Nonprofit insurers get tax exempt status if they can plausibly claim to serve the public good in some way, through charitable causes or related activities. For Blue Shield, that’s in part the contributions it makes to its foundation, the Blue Shield of California Foundation, but regulators apparently decided those contributions weren’t high enough. More:
The board said the rationale behind its decision was “not public information.”One likely explanation, however, is the $4.2 billion the company reports it is holding in financial reserves. That’s four times larger than the national trade organization, Blue Cross and Blue Shield Association, requires members to hold in surplus to pay out member claims […]Gerald Kominski, a professor of health policy at the University of California Los Angeles, said that the decision to revoke Blue Shield’s tax exemption “sends a very, very strong message to large nonprofits to be sure that you’re functioning as a nonprofit, that you’re not shielding assets or revenue from taxation and that you’re generally serving the public good.”
If Kominski is right, non-profit hospitals in California might have reason to be worried. Some experts, like Steven Brill, author of an influential expose on American health care costs, argue that nonprofit hospitals actually make large profits while their charitable work (like giving care to the uninsured for free) doesn’t actually offset the profits they make. And nonprofit hospitals have lost their status before—in 2004, for example, the Illinois Department of Revenue took exemption away from one state hospital because it was not deemed charitable enough (in that case, it had less to do with the profits made and more with how the institution operated). Since then, this Reuters rundown shows that Illinois in general has been active in questioning whether some nonprofit hospitals deserve tax exemption. If regulators start applying this argument to other hospitals, then states might start making nonprofit hospitals pay state taxes as well.