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Bankrupt Health Care
California Forces Deadbeat Insurer to Pay Its Taxes

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.

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  • Fat_Man

    Politicians love to beat up on intermediaries like insurance companies. But, like those round bottom dolls that pop up when you punch them, you can’t hurt an insurance company. All you can do is force it to raise its rates. And, since the insurance company’s customers must buy its product (see what Obamacare was really about), the people who get hurt are the same ones who were so happy to see the politicians beat up the insurance company.

    P.T. Barnum once explained it all: “There is a sucker born every minute’.

    As for the hospitals, they are a different story. They should only be treated as non-profits, if they truly act as charities. A truly charitable hospital would not charge for its services, but would give them to every one without requiring payment. It could ask for contributions, but only after the patient is healed and has gone home. Everyone else should pay their taxes.

    • FriendlyGoat

      St. Jude’s Children’s Hospital is a good model. But we do not have enough charitable contributions to run them all that way.

  • Jacksonian_Libertarian

    Everything about this is just insane, Government deciding what is too much profit, taxes on businesses which are all owned by people (who should be the ones being taxed), the government monopoly takeover of healthcare when they can’t even do the simple things they have the authority to do efficiently. Let me explain, when a business activity is very profitable every business wants in on the activity, this creates competition, and it’s the “Feedback of Competition” that forces continuous improvements in Quality, Service, and Price in free markets. If we want medical services to improve, we must have ruthless dog eat dog competition, NOT a bunch of arrogant and ignorant bureaucrats deciding what’s too profitable.

  • Kevin

    Companies that are organized as nonprofits under the tax code should be taxed as normal companies if they compete with for profit firms.

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