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SACRAMENTO, Calif. (AP) — A decision to strip Blue Shield of California of its tax-exempt status was justified by an audit that outlines the nonprofit health insurer's stockpiling of $4 billion in surpluses, state tax officials said in a report.
The California Franchise Tax Board audit slammed Blue Shield for its "extraordinarily high surpluses" and for failing to offer more affordable coverage or other public benefits, the Los Angeles Times reported Sunday (http://lat.ms/1H8cCu3 ).
The insurer's operations are indistinguishable from those of its for-profit health care competitors, auditors found.
"Blue Shield is not operating exclusively for the promotion of civic betterment or social welfare," the key test for preserving its exemption, tax board officials Christie Maddox and Eddie Murillo-Corona wrote to the insurer in a 16-page report sent June 3, 2014.
Blue Shield is the state's third-largest health insurer with 3.4 million customers, 5,000 employees and $13.6 billion in revenue last year. Its tax-exempt status was revoked last August.
Since the Times made the revocation public in March, Blue Shield has come under increasing scrutiny from regulators, lawmakers and consumer groups over its massive financial reserves and its proposed purchase of a Medicaid insurer for $1.2 billion.
The health insurer argued in favor of its tax exemption, pointing to charitable giving of about $30 million annually and its voluntary 2 percent cap on profits.
The auditors were not moved. They also expressed concern that job descriptions for top executives directed them to "maximize profitability."
"These stated objectives, particularly those which stress profitability, are inconsistent with an organization organized as a nonprofit which desires tax-exempt status," officials wrote.
The company continues to appeal the state's revocation.
Winning an appeal might be difficult considering that the tax board soundly rejected many of Blue Shield's assertions that its actions benefit all Californians, according to correspondence reviewed by The Times.
In the report, tax officials took special note of how Blue Shield's surplus nearly doubled from $2.26 billion in 2006 to $4.15 billion in 2012, the last year examined.
Auditors disputed the company's contention that it needed the extra cash cushion to deal with an extremely volatile market for health insurance, particularly during the rollout of the Affordable Care Act.
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Information from: Los Angeles Times, http://www.latimes.com/
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