Blue Shield of California Loses Tax-Exempt Status

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The state Franchise Tax Board has stripped Blue Shield of California of its tax-exempt status, a move that could make the 76-year-old San Francisco health insurer responsible for paying millions in state income taxes.

Officials from the tax board would not explain why they took the action in August, but critics have long accused the insurer, until now classified as a nonprofit, of acting like a for-profit while amassing billions of dollars in reserves, paying high executive salaries and hitting consumers with rate hikes.

“Blue Shield charges excessive rates and acts like a for-profit health insurer,” said Dave Jones, the state insurance commissioner, in a press call Wednesday. “Blue Shield is dodging taxes that other legitimate businesses and individuals pay.”

Blue Shield, the third-largest insurer in the state behind Kaiser Permanente and Anthem Blue Cross, is appealing the revocation and plans to continue operating as a nonprofit. Not-for-profits do not have to answer to shareholders and get tax breaks in exchange for providing a public benefit, such as financial aid to support health care in impoverished areas.

“Regardless of whether we prevail in our dispute, we will continue to fulfill our not-for-profit mission,” Stephen Shivinsky, spokesman for Blue Shield, said Wednesday.

Shivinsky said a resolution could take “months, if not many months” to reach. While the actual financial costs of paying the estimated $40 million in additional state taxes is not a huge burden, he said, the company wants to retain its nonprofit status.

The insurer has been paying federal income taxes for years, and has been paying the state gross premium tax since 2013, he said.

The insurer’s critics say the amount of money Blue Shield generates and spends doesn’t make sense for a nonprofit. Blue Shield, which has about 3.4 million customers, generated $13.6 billion in revenue last year and has amassed some $4.2 billion in reserves.

The Chronicle revealed in August that Blue Shield paid $2.5 million for a luxury box at the 49ers’ new Levi's Stadium in Santa Clara. Blue Shield’s former chief executive officer, Bruce Bodaken, made $4.6 million in 2010 and 2011, a figure that raised eyebrows for being much higher than salaries at its for-profit competitors.

Consumer Watchdog, a consumer group from Santa Monica, lauded the decision to strip Blue Shield of its tax-exempt status but questioned the way it was done.

The group’s president, Jamie Court, questioned how the Franchise Tax Board and Blue Shield could be allowed to “sit on this information” since August, and called for a more open process.

The tax board’s decision came to light in a Los Angeles Times story Wednesday. The story was prompted by a former Blue Shield executive who started an online campaign calling on Blue Shield’s board to convert the insurer to a for-profit company and transfer its assets back to the public in the form of bolstering the heath care safety net for the poor.

The executive, Michael Johnson, who resigned last week as public policy director after working for Blue Shield for 12 years, said he did not know his former employer’s not-for-profit status had been revoked until the Times contacted the tax board.

“Lots of people have been raising questions about whether nonprofit health organizations, in general, are providing value to the public and whether they are justifying their tax exemptions,” said Johnson, 52, of Los Angeles.

Blue Shield officials tout the company’s early support of the federal health care law, its decision to limit net income to 2 percent of revenue, and the $325 million its foundation donates to improve health in poor communities and combat domestic violence as evidence of its public good will.

But Consumer Watchdog’s executive director, Carmen Balber, was unmoved. “We’ve been talking about Blue Shield’s excessive rates, excessive executive pay, out-of-control reserves and ridiculous expenses, like luxury sky boxes, for a very long time,” she said. “This is just vindication that Blue Shield is not operating as a charitable organization.”

Victoria Colliver is a San Francisco Chronicle staff writer. E-mail: [email protected] Twitter: @vcolliver

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