Authorities have revoked the tax-exempt status of nonprofit Blue Shield of California, potentially putting it on the hook for tens of millions of dollars in state taxes each year.
The move by the California Franchise Tax Board comes as the state's third-largest health insurer faces fresh criticism over its rate hikes, executive pay and $4.2 billion in financial reserves.
The state quietly stripped the San Francisco insurer of its exemption from California income taxes in August. The company held that since its founding in 1939.
A spokeswoman for the tax agency declined to comment on the reasons for revocation. The highly unusual action comes after a lengthy state audit that looked at the justification for Blue Shield's taxpayer subsidy. The insurer has paid federal taxes for years.
Blue Shield said Tuesday that it's protesting the decision. In the meantime, state officials have ordered it to file tax returns back to 2013.
Blue Shield has about 3.4 million customers and 5,000 employees and posted $13.6 billion in revenue last year. It trails only nonprofit Kaiser Permanente and for-profit Anthem Inc. in statewide enrollment.
Now, a company insider has sided with critics. Michael Johnson, who resigned as public policy director last week after 12 years at the company, said the insurer has been "shortchanging the public" for years by shirking its responsibility to Californians and operating too much like its for-profit competitors.
On Wednesday, Johnson plans to launch a public campaign calling on executives to convert the insurer into a for-profit company and return billions of dollars to the public that could be used to bolster the state's healthcare safety net. He estimates the company could be worth as much as $10 billion.
Switching an insurer to for-profit status has happened before in California and across the country.
In 1996, a similar conversion of Blue Cross of California — now part of Anthem — generated $3 billion to establish the California Endowment and the California HealthCare Foundation.
"The public is not getting its money's worth out of Blue Shield now," Johnson said in an interview.
For years, Blue Shield has overcome similar criticisms, drawing on its powerful brand name and long history. But this time may be different if state officials ratchet up the pressure with hearings or legislation.
The company defends its work on behalf of Californians. It cites its long-standing support of health reform and numerous efforts to make coverage more affordable.
"Blue Shield as a company and management team firmly believes it is fulfilling its not-for-profit mission and commitment to the community," said company spokesman Steve Shivinsky.
He declined to comment on Johnson's effort until more details are available.