Call to Tax Blue Cross Since It’s no Nonprofit

     LOS ANGELES (CN) – A taxpayer demands that California tax Blue Cross and Blue Shield as the profit-making organizations they are, not, as they fictionally describe themselves, as nonprofits.
     Michael D. Myers sued the State Board of Equalization et al. in Superior Court, seeking writ of mandamus for them to “perform their respective ministerial duties.”
     Defendants include Insurance Commissioner David Jones and state Controller John Chiang.
     Defendants as real parties in interest are California Physicians’ Service dba Blue Shield of California, and Blue Cross of California dba Anthem Blue Cross, a wholly owned subsidiary of Wellpoint.
     (Anthem Blue Cross provides insurance benefits to Courthouse News Service employees.)
     Myers claims the state defendants’ ministerial duties include collecting a gross premium tax on the billions of dollars Blue Cross et al. collect in California each year.
     The California Medical Association incorporated Blue Shield in 1939 as a nonprofit, for the purpose of arranging health case for low-income Californians, Myers says in the complaint.
     In those early years, Blue Shield assumed no risk to provide or pay for medical treatment; it existed to connect its underserved subscribers to physicians willing to treat them.
     In the 1960s, Blue Shield abandoned its original mission and began selling health care indemnity contracts to anyone, regardless of income. Despite its shift – and its offering of indemnity contracts – state officials required Blue Shield to register only as a pre-paid health plan. This allowed Blue Cross to continue operating with minimal government oversight or regulation, Myers claims.
     Blue Shield has more than 2.8 million customers for its PPO and HMO plans, making it the third-largest insurer in California. It generates $7 billion a year in premiums, and reported a net equity of nearly $3.9 billion in 2012, Myers says in the complaint.
     Nearly two-thirds of Blue Shield’s members have PPO plans, which the company acknowledges constitute traditional health insurance and are subject to the state gross premium tax, according to the complaint.
     In fact, for at least 10 years the PPO contracts have contained a clause acknowledging this tax liability, informing members that “additional dues may be charged in the event that a state or any other taxing authority imposes upon Blue Shield of California a tax or license fee which is calculated upon base dues or Blue Shield of California’s gross receipts or any portion of either,” Myers says in the complaint.
     While Blue Shield has always enjoyed bureaucratic accommodation, Blue Cross was at one time regulated by the California Department of Insurance. But in 1993, a series of legislative acts designed to save Blue Cross from bankruptcy handed oversight to the Department of Corporations – allowing it to continue selling PPOs while receiving the pre-paid health plan tax exemption.
     Blue Cross changed its status to for-profit in 1996, when Wellpoint Health Networks purchased it and later merged with Anthem Holding Corp. It issues more PPO plans in California than any other insurer and – like Blue Shield – pays nothing in gross premium tax, according to the complaint.
     California’s Constitution mandates gross premium taxes, which are designed to “approximate the volume of business done in this state, and thus the extent to which insurers have availed themselves of the privilege of doing business in California,” Myers claims, citing Metropolitan Life Insurance Co. v. State Board of Equalization.
     Myers says the process for determining whether the tax is owed is straightforward: a company that sells insurance must pay taxes on its income from dues and premiums. The tax applies to all insurers doing business in California, whether regulated by the Department of Insurance or – as in the case of Blue Shield and Blue Cross – the Department of Corporations.
     Despite the companies’ contention they are pre-paid health plan providers and not insurers, Myers says in the complaint that both companies do most of their business and receive most of their income from insurance.
     In 2012, Blue Shield paid out more than three times more for its insurance policies than it did for its pre-paid health plans – $5.3 billion versus $1.7 billion, according to the complaint.
     And Blue Shield’s net worth has skyrocketed in the past decade, from just over $740 million in 2002 to nearly $3.9 billion last year.
     “Blue Shield has the third-largest enrollment of any health care plan with the fourth-largest premium revenue stream in the state. It has gained a financial advantage over its health insurance company competitors by not paying a gross premium tax on the health insurance premiums it has collected from its California insureds over the last several years. Despite its status as a not-for-profit mutual benefit corporation, Blue Shield has not passed its savings from its non-payment of gross premium taxes to its policyholders. Blue Shield has instead retained such monies and thereby dramatically increased its net worth to multiples of the tangible net equity it is required to maintain. Blue Shield created a fivefold increase in its net worth over the last decade, from $740,120,000 in 2002 to $3,857,631,000 in 2012. Blue Shield’s tangible net equity in 2012 was more than $3 billion greater than it was required to maintain,” Myers says in the complaint.
     The differences between insurance and pre-paid health plans for Blue Cross are even greater, Myers claims. In 2012, Blue Cross – California’s second largest insurer behind Kaiser – made $7.2 billion in payments for its insurance clients, and just $1.8 billion for its pre-paid customers.
     While Blue Cross’s net worth increased by less than $200 million from 2002 to 2012, it has also paid more than $5 billion in dividends to its out-of-state parent company Wellpoint – and nothing in gross premium taxes to the State of California.
     “Respondents have failed to ascertain, assess and collect the gross premium tax owed by both Blue Shield and Blue Cross from the gross premiums each collected within California for the indemnity provisions of their respective health insurance products issued in this state,” the complaint states. “Such failure to assess and collect the gross premium tax from real parties in interest Blue Cross and Blue Shield constitutes a waste of tax monies owed to the state warranting mandamus against respondents. Since neither Blue Cross nor Blue Shield have ever filed the required gross premium tax returns, each is liable for eight years of past-due payments, interest and penalties pursuant to [California tax code],” Myers says.
     Myers wants the court to declare that the companies are “insurers” for the purposes of the tax, and to order state officials to collect current and past due gross premium taxes, penalties and interest.
     He is represented by Robert Gianelli and Timothy Morris of Los Angeles, and Richard Ayoob of the Glendale firm of Ajalat, Polley, Ayoob & Matarese.
     Blue Cross and its affiliates have long been accused of paying enormous salaries, for a nonprofit, to its executives. Its CEO Patricia Hemingway Hall was paid $12.9 million in 2011, and multiple executives in multiple states across the country are paid more than $1 million a year, according to company and news reports.

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